Solomon Company produces two products. Budgeted annual income statements for the

Question

Solomon Company produces two products. Budgeted annual income statements for the two products are provided here:

    

Required:

Based on budgeted sales, determine the relative sales mix between the two products.

Determine the weighted-average contribution margin per unit.

Calculate the break-even point in total number of units.

Determine the number of units of each product Solomon must sell to break even.

Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.

Determine the margin of safety based on the combined sales of the two products.

Power Lite Total Budgeted Per Budgeted Budgeted Per Budgeted Budgeted Budgeted Number Unit Amount Number Unit Amount Number Amount Sales 170 @ $ 760 = $ 129,200 680 @ $ 550 = $ 374,000 850 $ 503,200 Variable cost 170 @ 420 = (71,400 ) 680 @ 290 = (197,200 ) 850 (268,600 ) Contribution margin 170 @ 340 = 57,800 680 @ 260 = 176,800 850 234,600 Fixed cost (18,000 ) (120,000 ) (138,000 ) Net income $ 39,800 $ 56,800 $ 96,600

Explanation / Answer

a. Sales mix:

Power: 170/850 = 20%

Lite: 680/850 = 80%

b.

Total weighted average contribution per unit = $2760 / 10 = $276

c. Break-even point in total number of units: 500 units

Assume the total volume of sales (units) = X

For break-even: Weighted average contribution per unit x X - Total Fixed costs = Operating income

$276X - $138000 = $0

$276X = $138000

X = $138000/$276 = 500 units

d. Number of break-even units of each product

Power: 500 units x 20% = 100 units

Lite: 500 units x 80% = 400 units

e.

f. Margin of safety = Actual sales - Break-even sales = $503200 - $296000 = $207200

Margin of safety % = Margin of safety/Actual sales = $207200/$503200 = 41.2%

Power Lite Total Contribution per unit $ 340 260 600 Sales Mix (2 : 8) 2 8 10 Total contribution $ 680 2080 2760

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