Cherry Blossom Products Inc. produces and sells yoga-training products:how-to DVDs and a basic equipment set (blocks, strap, and smallpillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500equipment sets. Information on the two products is as follows: DVD's Equipment Sets PriceVariable cost per unit $84 $2515 Total fixed cost is $84,920. Refer to the information for Cherry Blossom Products on the previouspage. Suppose that in the coming year, the company plans to produce anextra-thick yoga mat for sale to health clubs. The company estimates that9,000 mats can be sold at a price of $15 and a variable cost per unit of $9.Total fixed cost must be increased by $28,980 (making total fixed cost$113,900). Assume that anticipated sales of the other products, as well astheir prices and variable costs, remain the same. Required: 1. What is the sales mix of DVDs, equipment sets, and yoga mats?2. Compute the break-even quantity of each product.3. Prepare an income statement for Cherry Blossom Products forthe coming year. What is the overall contribution margin ratio? Usethe contribution margin ratio to compute overall break-even sales revenue. (Note: Round the contribution margin ratio to fourdecimal places; round the break-even sales revenue to the nearestdollar.)4. Compute the margin of safety for the coming year in salesdollars.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Cherry Blossom Products Inc. produces and sells yoga-training products:
how-to DVDs and a basic equipment set (blocks, strap, and small
pillows). Last year, Cherry Blossom Products sold 13,500 DVDs and 4,500
equipment sets. Information on the two products is as follows:
| DVD's | Equipment Sets | |
| Price Variable cost per unit |
$8 4 |
$25 15 |
Total fixed cost is $84,920.
Refer to the information for Cherry Blossom Products on the previous
page. 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 $15 and a variable cost per unit of $9.
Total fixed cost must be increased by $28,980 (making total fixed cost
$113,900). Assume that anticipated sales of the other products, as well as
their prices and variable costs, remain the same.
Required:
1. What is the sales mix of DVDs, equipment sets, and yoga mats?
2. Compute the break-even quantity of each product.
3. Prepare an income statement for Cherry Blossom Products for
the coming year. What is the overall contribution margin ratio? Use
the contribution margin ratio to compute overall break-even sales revenue. (Note: Round the contribution margin ratio to four
decimal places; round the break-even sales revenue to the nearest
dollar.)
4. Compute the margin of safety for the coming year in sales
dollars.
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