Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue,cost, and sales data for the two products follow:Hawaiian TahitianFantasy JoySelling price per unit .................................. $15 $100Variable expenses per unit ........................ $9 $20Number of units sold annually ................... 20,000 5,000Fixed expenses total $475,800 per year. The Republic of Palau uses the U.S. dollar as its currency.Required:1. Assuming the sales mix given above, do the following:a. Prepare a contribution format income statement showing both dollar and percent columns for eachproduct and for the company as a whole.b. Compute the break-even point in dollars for the company as a whole and the margin of safety inboth dollars and percent.2. The company has developed a new product to be called Samoan Delight. Assume that the companycould sell 10,000 units at $45 each. The variable expenses would be $36 each. The company’s fixedexpenses would not change.a. Prepare another contribution format income statement, including sales of the Samoan Delight(sales of the other two products would not change).b. Compute the company’s new break-even point in dollars and the new margin of safety in bothdollars and percent.3. The president of the company examines your figures and says, “There’s something strange here.Our fixed expenses haven’t changed and you show greater total contribution margin if we add thenew product, but you also show our break-even point going up. With greater contribution margin,the break-even point should go down, not up. You’ve made a mistake somewhere.” Explain to thepresident what has happened.
Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue,
cost, and sales data for the two products follow:
Hawaiian Tahitian
Fantasy Joy
Selling price per unit .................................. $15 $100
Variable expenses per unit ........................ $9 $20
Number of units sold annually ................... 20,000 5,000
Fixed expenses total $475,800 per year. The Republic of Palau uses the U.S. dollar as its currency.
Required:
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing both dollar and percent columns for each
product and for the company as a whole.
b. Compute the break-even point in dollars for the company as a whole and the margin of safety in
both dollars and percent.
2. The company has developed a new product to be called Samoan Delight. Assume that the company
could sell 10,000 units at $45 each. The variable expenses would be $36 each. The company’s fixed
expenses would not change.
a. Prepare another contribution format income statement, including sales of the Samoan Delight
(sales of the other two products would not change).
b. Compute the company’s new break-even point in dollars and the new margin of safety in both
dollars and percent.
3. The president of the company examines your figures and says, “There’s something strange here.
Our fixed expenses haven’t changed and you show greater total contribution margin if we add the
new product, but you also show our break-even point going up. With greater contribution margin,
the break-even point should go down, not up. You’ve made a mistake somewhere.” Explain to the
president what has happened.
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