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Problem 3-22 (30 minutes)
1.
Product
Sinks
Mirrors
Vanities
Total
Percentage of total
sales .........................
32%
40%
28%
100%
Sales ...........................
$160,000
100
%
$200,000
100
%
$140,000
100
%
$500,000
100
%
Variable expenses ........
48,000
30
%
160,000
80
%
77,000
55
%
285,000
57
%
Contribution margin ......
$112,000
70
%
$ 40,000
20
%
$ 63,000
45
%
215,000
43
%*
Fixed expenses ............
223,600
Net operating income
(loss) ........................
$ (8,600)
*$215,000 ÷ $500,000 = 43%.
Problem 3-23 (45 minutes)
1.
a.
Alvaro
Bazan
Total
%
%
%
Sales ..........................
€800
100
€480
100
€1,280
100
Variable expenses
480
60
96
20
576
45
Contribution margin ....
€320
40
€384
80
704
55
Fixed expenses ...........
660
Net operating income ..
€ 44
b.
Fixed expenses €660
Dollar sales to = = = €1,200
break even CM ratio 0.55
Margin of safety = Actual sales - Break-even sales
= €1,280 - €1,200 = €80
Margin of safety Margin of safety in euros
=
percentage Actual sales
€80
= = 6.25%
€1,280
Problem 3-23 (continued)
b.
Fixed expenses €660
Euro sales to = = = €1,347(rounded)
break even CM ratio 0.49
Margin of safety = Actual sales - Break-even sales
= €1,600 - €1,347 = €253
Margin of safety Margin of safety in euros
=
percentage Actual sales
€253
= = 15.81%
€1,600
3. The reason for the increase in the break-even point can be traced to the
decrease in the company’s average contribution margin ratio when the
third product is added. Note from the income statements above that this
ratio drops from 55% to 49% with the addition of the third product.
This product, called Cano, has a CM ratio of only 25%, which causes the
average contribution margin ratio to fall.
This problem shows the somewhat tenuous nature of break-even
analysis when more than one product is involved. The manager must be
very careful of his or her assumptions regarding sales mix when making
decisions such as adding or deleting products.
It should be pointed out to the president that even though the break-
even point is higher with the addition of the third product, the
company’s margin of safety is also greater. Notice that the margin of
Problem 3-24 (continued)
May's Income Statement:
Standard
Deluxe
Pro
Total
Amount
%
Amount
%
Amount
%
Amount
%
Sales ............................
$320,000
100
$60,000
100
$270,000
100
$650,000
100.0
Variable expenses:
Production .................
176,000
55
27,000
45
94,500
35
297,500
45.8
Selling .......................
16,000
5
3,000
5
13,500
5
32,500
5.0
Total variable expenses .
192,000
60
30,000
50
108,000
40
330,000
50.8
Contribution margin ......
$128,000
40
$30,000
50
$162,000
60
320,000
49.2
Fixed expenses:
Production .................
120,000
Advertising ................
100,000
Administrative ............
50,000
Total fixed expenses .....
270,000
Net operating income ....
$ 50,000
Problem 3-25 (45 minutes)
1.
Sales (25,000 units × SFr 90 per unit) ..................
SFr 2,250,000
Variable expenses
(25,000 units × SFr 60 per unit) ........................
1,500,000
Contribution margin .............................................
750,000
Fixed expenses ...................................................
840,000
Net operating loss ...............................................
SFr (90,000)
2.
Fixed expenses
Unit sales =
to break even Unit contribution margin
SFr 840,000
= = 28,000 units
SFr 30 per unit
28,000 units × SFr 90 per unit = SFr 2,520,000 to break even.
3. See the next page.
4. At a selling price of SFr 80 per unit, the contribution margin is SFr 20
per unit. Therefore:
Fixed expenses
Unit sales =
to break even Unit contribution margin
SFr 840,000
= SFr 20 per unit
= 42,000 units
42,000 units × SFr 80 per unit = SFr 3,360,000 to break even.
