Peace River Products Inc. produces and sells yoga-training products: how to DVDs

Question

Peace River Products Inc. produces and sells yoga-training products:  how to DVDs and a basic equipment set (blocks, strap, and small pillows).  Last year, Peace River Products sold 18,000 DVDs and 4,500 equipment sets. Information on the two products is as follow

Price                                        $8 for DVDs                                  $25 for Equipment sets

Variable cost per unit               4 for DVDS                                    16 for Equipment

Total fixed cost is $85,000.

Refer to the information for Peace River Products above.  Suppose that in the coming year, the company plans to produce an extra-thick yoga mat for sale to health clubs.  The company estimates that 9,000 mats can be sold at a price of $18 and a variable cost per unit of $13.  Total fixed cost must be increased by $29,100 (making total fixed cost $114,100). Assume that anticipated sales of the other products, as well as their prices and variable costs, remain the same.

3.            Prepare an income statement for Peace River Products for the coming year.  What is the overall contribution margin ratio?  The overall break-even sales revenue?

Explanation / Answer

Part 1 Sales mix Quantity to be sold DVDs 18,000 Equipment sets 4,500 Yoga mats 9,000 Sales Mix DVDs                         4 hint: these cells already have formulas; they will automatically compute the sales mix Equipment sets                         1 Yoga mats                         2 Part 2 Product Price - Variable Cost = Contribution Margin x Sales mix = Total Contribution margin DVDs $8 $4 $4             4 $16 Equipment sets $25 $16 $9             1 $9 Yoga mats $18 $13 $5             2 $10      Total $35 Break-even packages Total fixed costs $114,100 hint: given in problem Total contribution margin $35 hint: from table above, cell J29 Break-even packages 3,260 hint: total fixed costs / total contribution margin Break-even packages 3,260 hint: figure from cell B34 Sales mix for DVDs                         4 hint: cell contains a formula; will automatically populate Break-even DVDs in units 28,525 Break-even packages 3,260 hint: figure from cell B34 Sales mix for equipment sets                         1 hint: cell contains a formula; will automatically populate Break-even equipment sets in units 12,678 Break-even packages 3,260 hint: figure from cell B34 Sales mix for yoga mats                         2 hint: cell contains a formula; will automatically populate Break-even yoga mats in units 22,820 Part 3 Peace River Products, Inc. Income Statement For the coming year Sales $418,500 Total variable cost $261,000     Contribution margin $157,500 Total fixed costs $114,100     Operating income $43,400 Part 4 Sales $43,400 Break-even sales $6,338 Margin of safety in dollars $37,062

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