Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitia

Question

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:

Hawaiian Fantasy Tahitian Joy
Selling price per unit $ 36 $ 120
Variable expense per unit $ 18 $ 30
Number of units sold annually 16,000 7,200

Fixed expenses total $812,500 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $40 each and that has variable expenses of $30 per unit. If the company can sell 24,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Explanation / Answer

Product Hawaiian Fantasy Tahitian Joy Samoan Delight Total Selling price Per unit 36 120 40 196 Variable cost per unit 18 30 30 78 Contribution Margin per unit (Sales-Variable cost) 18 90 10 118 Fixed Cost 812500 Units Sold 16000 7200 24000 47200 1. a Income Statement as per Contribution Margin Method Hawaiian Fantasy Tahitian Joy Total Amount % Amount % Amount % Sales (Unit sold* per unit price)                         (A) 576000 100% 864000 100% 1440000 100% Variable Expenses (Unit sold* per unit cost)       (B) 288000 50% 216000 25% 504000 35% Contribution Margin                                     (A-B) 288000 50% 648000 75% 936000 65% Fixed Expense 812500 Net Operating Income (A-B-C) 123500 1. b BEP in $ (Fixed Cost/CM %) 1250000 Margin of Safety In $   (Actual Sales-BEP sales) 190000 In % (Safety Margin in amount/Actual Sales) 13% 2. a Revised Income Statement as per Contribution Margin Method Hawaiian Fantasy Tahitian Joy Samoan Delight Total Amount % Amount % Amount % Amount % Sales (Unit sold* per unit price)                         (A) 576000 100% 864000 100% 960000 100% 2400000 100% Variable Expenses (Unit sold* per unit cost)       (B) 288000 50% 216000 25% 720000 75% 1224000 51% Contribution Margin                                     (A-B) 288000 50% 648000 75% 240000 25% 1176000 49% Fixed Expense 812500 Net Operating Income (A-B-C) 363500 2. b BEP in $ (Fixed Cost/CM %) 1658163 Margin of Safety In $   (Actual Sales-BEP sales) 741836.7 In % (Safety Margin in amount/Actual Sales) 31%

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