Problem 3-25A (Algo) Determining the break-even point and margin of safety for a company with multiple products LO 3-6 Vernon Company produces two products. Budgeted annual income statements for the two products are provided as follows. Power Lite Total Budgeted Budgeted Per Amount Number Unit $ 216,000 (133,200) 82,800 (10,000) $ 72,800 840 @$580 840 840 Sales Variable cost Contribution margin Fixed cost Net income Budgeted Per Unit @ $600 Number 360 360 @ 370 360 @ 230 = @ 390= @190 = Budgeted Amount $ 487,200 (327,600) 159, 600 (131,400) $ 28,200 Complete this question by entering your answers in the tabs below. Budgeted Budgeted Number Amount 1,200 $ 703,200 1,200 1,200 (460,800) 242,400 (141,400) $ 101,000 Required: a. Based on budgeted sales, determine the relative sales mix between the two products. b. Determine the weighted-average contribution margin per unit. c. Calculate the break-even point in total number of units. d. Determine the number of units of each product Vernon must sell to break even. e. Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products. f. Determine the margin of safety based on the combined sales of the two products.
Problem 3-25A (Algo) Determining the break-even point and margin of safety for a company with multiple products LO 3-6 Vernon Company produces two products. Budgeted annual income statements for the two products are provided as follows. Power Lite Total Budgeted Budgeted Per Amount Number Unit $ 216,000 (133,200) 82,800 (10,000) $ 72,800 840 @$580 840 840 Sales Variable cost Contribution margin Fixed cost Net income Budgeted Per Unit @ $600 Number 360 360 @ 370 360 @ 230 = @ 390= @190 = Budgeted Amount $ 487,200 (327,600) 159, 600 (131,400) $ 28,200 Complete this question by entering your answers in the tabs below. Budgeted Budgeted Number Amount 1,200 $ 703,200 1,200 1,200 (460,800) 242,400 (141,400) $ 101,000 Required: a. Based on budgeted sales, determine the relative sales mix between the two products. b. Determine the weighted-average contribution margin per unit. c. Calculate the break-even point in total number of units. d. Determine the number of units of each product Vernon must sell to break even. e. Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products. f. Determine the margin of safety based on the combined sales of the two products.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Master Budget
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Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
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Transcribed Image Text:# Problem 3-25A (Algo) Determining the Break-even Point and Margin of Safety for a Company with Multiple Products LO 3-6
## Overview
Vernon Company produces two products. Below are the budgeted annual income statements for these products:
### Product Details
#### Power
- **Sales**: 360 units @ $600 each = $216,000
- **Variable Cost**: 360 units @ $370 each = $133,200
- **Contribution Margin**: 360 units @ $230 each = $82,800
- **Fixed Cost**: $10,000
- **Net Income**: $72,800
#### Lite
- **Sales**: 840 units @ $580 each = $487,200
- **Variable Cost**: 840 units @ $390 each = $327,600
- **Contribution Margin**: 840 units @ $190 each = $159,600
- **Fixed Cost**: $131,400
- **Net Income**: $28,200
#### Total
- **Sales**: 1,200 units = $703,200
- **Variable Cost**: 1,200 units = $460,800
- **Contribution Margin**: 1,200 units = $242,400
- **Fixed Cost**: $141,400
- **Net Income**: $101,000
## Requirements
a. **Relative Sales Mix**: Based on budgeted sales, determine the relative sales mix between the two products.
b. **Weighted-Average Contribution Margin**: Determine the weighted-average contribution margin per unit.
c. **Break-even Point**: Calculate the break-even point in total number of units.
d. **Break-even Units**: Determine the number of units of each product Vernon must sell to break even.
e. **Verification**: Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.
f. **Margin of Safety**: Determine the margin of safety based on the combined sales of the two products.
## Instructions
Complete each step by entering your answers in the tabs provided below.
- **Required A**: Provide details for the relative sales mix.
- **Required B**: Calculate the weighted-average contribution margin.
- **Required C**: Calculate the break-even point in total number of units.
- **Required
Transcribed Image Text:**Vernon Company Budgeted Annual Income Statement Breakdown**
Vernon Company produces two products: Power and Lite. Below is a detailed overview of the budgeted annual income statements for both products combined.
### Budgeted Income Statement
**Power**
- **Sales:** 360 units @ $600 each = $216,000
- **Variable Cost:** 360 units @ $370 each = ($133,200)
- **Contribution Margin:** 360 units @ $230 each = $82,800
- **Fixed Cost:** ($10,000)
- **Net Income:** $72,800
**Lite**
- **Sales:** 840 units @ $580 each = $487,200
- **Variable Cost:** 840 units @ $390 each = ($327,600)
- **Contribution Margin:** 840 units @ $190 each = $159,600
- **Fixed Cost:** ($131,400)
- **Net Income:** $28,200
**Total**
- **Sales:** 1,200 units = $703,200
- **Variable Cost:** 1,200 units = ($460,800)
- **Contribution Margin:** 1,200 units = $242,400
- **Fixed Cost:** ($141,400)
- **Net Income:** $101,000
### Required Calculations
a. **Relative Sales Mix**
- Determine the percentage of total sales accounted for by each product.
b. **Weighted-Average Contribution Margin Per Unit**
- Calculate the contribution margin for both products combined, weighted by sales mix.
c. **Break-Even Point in Total Units**
- Find out how many total units must be sold to cover all costs.
d. **Break-Even Units for Each Product**
- Identify the number of units for Power and Lite needed to break even.
e. **Verification of Break-Even Point through Income Statement**
- Create an income statement showing that the break-even point achieves zero net income.
f. **Margin of Safety**
- Determine the margin of safety in terms of sales above the break-even point.
### Worksheet Tabs
- **Required A:** Relative Sales Mix
- **Required B:** Weighted-Average Contribution Margin
- **Required C:** Break-Even Point Calculation
- **Required D:** Units to Break Even for Power and Lite
- **Required E:** Income Statement Verification
- **Required F:** Margin of Safety
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Introduction:
The break-even point (break-even price) of a transaction or investment is determined by comparing the market price of a product to the initial cost; the break-even value is reached when the two values are equal. In corporate accounting, the break-even point is computed by dividing the entire fixed costs of production by the revenue per individual unit less the variable expenses per unit. Fixed costs are those that do not change regardless of how many units are sold.
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