Praveen Co. manufactures and markets a number of rope products. Management is co

Question

Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $320 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $316,800, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $224 per 100 yards of XT rope.

Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

PRAVEEN CO. Contribution Margin Income Statement (at Break-Even) — Product XT Units $ per unit Total Contribution margin

Explanation / Answer

Break-even point in units = Total fixed costs / Contribution margin per unit Total fixed costs = $316800 Contribution margin per unit = Selling price per unit - Total variable cost per unit Contribution margin per 100 yards = $320 - $224 = $96 per 100 yards Contribution margin per unit = $96/100 = 0.96 per yards Break-even point in units = $316800/0.96 = 330000 yards PRAVEEN CO. Contribution margin income statement (at break-even) - Product XT Units $ per unit Total Sales revenue 330000 $3.2 1056000 Variable costs 330000 $2.24 739200 Contribution margin 330000 $0.96 316800 Fixed costs 330000 316800 Net profit (loss) 330000 0

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