
1.
Compute the break-even point in dollar sales for each product.
1.

Explanation of Solution
Break-Even Point: It is the point of sales at which entity neither earns a profit nor suffers a loss. It can also be said that the point of sales at which sales value of the entity recovers the entire cost of fixed and variable nature is called break-even point
For product T:
Given, 50,000 units sold for $2,000,000, variable costs incurred is $1,600,000, and fixed costs are $125,000. Contribution margin ratio is 20% (Working note 1).
Compute the break-even point in dollar sales for year:
Therefore, break-even sales for Product T for the year are $625,000.
Working note1: Compute the contribution margin ratio
Sales price per unit | $40 |
Variable costs per unit | $32 |
Contribution margin per unit (B) | $8 |
Contribution margin ratio | 20% |
Table (1)
For product O:
Given, 50,000 units sold for $2,000,000, variable costs incurred is $250,000, and fixed costs are $1,475,000. Contribution margin ratio is 87.5% (Working note 2).
Compute the break-even point in dollar sales for year:
Working note 2: Compute the contribution margin ratio
Sales price per unit | $50 |
Variable costs per unit | $5 |
Contribution margin per unit (B) | $45 |
Contribution margin ratio | 87.5% |
Table (1)
Therefore, break-even sales for Product O for the year are $1,685,714.
2.
Prepare the contribution margin income statement.
2.

Explanation of Solution
Contribution margin income statement: It is a kind of income statement which reports the sales, variable costs, contribution margin, fixed costs, and net profit.
Sales are declined to 30,000 units. Therefore revised sales for product T are $1,200,000
Prepare the contribution margin income statement:
Company H | ||
Product T | Product O | |
Sales | $1,200,000 | $1,200,000 |
Less: Variable costs | 960,000 | 150,000 |
Contribution margin | 240,000 | 1,050,000 |
Less: Fixed costs | 125,000 | 1,475,000 |
Income before taxes | 115,000 | (425,000) |
Less: Income taxes (32%) | 36,800 | (136,000) |
Net income | $78,200 | $(289,000) |
Table (2)
Therefore, net income for Product T is $78,200 and net loss for Production O are $289,000.
3.
Prepare the contribution margin income statement.
3.

Explanation of Solution
Contribution margin income statement: It is a kind of income statement which reports the sales, variable costs, contribution margin, fixed costs, and net profit.
Sales are increased to 60,000 units. Therefore revised sales for product T are $2,400,000
Prepare the contribution margin income statement:
Company H | ||
Forecasted Contribution Margin Income Statement | ||
Product T | Product O | |
Sales | $2,400,000 | $2,400,000 |
Less: Variable costs | 1,920,000 | 300,000 |
Contribution margin | 480,000 | 2,100,000 |
Less: Fixed costs | 125,000 | 1,475,000 |
Income before taxes | 355,000 | 625,000 |
Less: Income taxes (32%) | 113,600 | 200,000 |
Net income | $241,000 | $425,000 |
Table (3)
Therefore, net income for Product T is $241,000 and for Production O is $425,000.
4.
Identify the product that would experience a greater loss when the sales are decreases greatly. Explain the same.
4.

Explanation of Solution
Product O will experience a greater loss when the sales are decreased greatly. When the sales decreased to zero sales then Product O’s loss is equal to its fixed cost amount ($1,475,000), where Product T’s loss will be equal to $125,000.
5.
Describe some factors that might have created the different cost structures for these two products.
5.

Explanation of Solution
Factors that could cause Product T to have lower fixed costs might include:
- The labours are paid based on the units produced.
- Sales representatives work only on the basis sales commission.
- Managers are remunerated with a share of profits instead of salaries.
- Assets that are used in production of Product T are taken on lease with the rent based on asset usage.
In contrast, fixed costs for Product O may be higher because of:
- A salary structure that is not based on production or sales.
- Product O's assets that are owned or obtained under a lease agreement based on time, and not on asset usage.
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Chapter 21 Solutions
Principles of Financial Accounting.
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