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EXERCISE 5-12 Multiproduct Break-Even Analysis LO5-9
Olongapo Sports Corporation distributes two premium golf balls—Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow:
Fixed expenses total $183,750 per month.
Required:
- Prepare a contribution format income statement for the company as a whole. Carry computations to one decimal place.
- What is the company's break-even point in dollar sales based on the current sales mix?
- If sales increase by $100,000 a month, by how much would you expect the monthly net operating income to increase? What are your assumptions?
Break-even analysis: It is an analysis of sales revenue or unit where a company is neither earning profits nor incurring any loss.
The preparation of contribution format income statement and break-even analysis.
Answer to Problem 12E
Solution:
1) Contribution formal income statement for the company as a whole. Carry computations to one decimal place is shown below:-
| Product | |||
| Fight Dynamic | Sure Shot | Total | |
| Sales | $150,000 | $250,000 | $400,000 |
| CM ratio | 80% | 36% | 52.5% |
| Olongapo Sports Corporation’s Contribution format income statement | |
| Total | |
| Sales | $400,000 |
| Variable expenses | $190,000 |
| Contribution Margin | $210,000 |
| Fixed expenses | $183,750 |
| Net operating income | $26,250 |
2) The Break-even point in dollar sales based on the current sales mix is $ 350,000
3) The contribution format income statement with increase in sales by $ 100,000 is shown below:-
| Olongapo Sports Corporation’s Contribution format income statement | |
| Total | |
| Sales | $500,000 |
| Variable expenses | $237,500 |
| Contribution Margin | $262,500 |
| Fixed expenses | $183,750 |
| Net operating income | $78,750 |
It is assume that when sales increase by $100,000, the variable expense increase by 25% and the net operating income increases by 200%.
Explanation of Solution
Given:
| Product | |||
| Fight Dynamic | Sure Shot | Total | |
| Sales | $150,000 | $250,000 | $400,000 |
| CM ratio | 80% | 36% | ? |
Fixed expenses total $183,750 per month.
Hence it is concluded that the Mauro Products will neither earn profit nor incur loss at $350,000sales revenue. But if the company earns beyond this point, it will make profit and if it falls below the point, the company will suffer loss. A break-even point is technique used the companies to predict the outcome of a decision based on the analysis. It shows the exact point where a company will neither make profit nor suffer loss.
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Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College