Concept explainers
1.
To identify: Break- even point of sales in dollars for each product.
1.

Explanation of Solution
Product T
Given,
Fixed cost is $125,000.
Calculated values,
Contribution margin ratio is 20% or 0.2 (from working note).
Formula to calculate break-even point of sales in dollars,
Substitute $125,000 for fixed cost and 0.2 for contribution margin ratio.
Working note:
Calculation of selling price per unit,
Calculation of variable cost per unit,
Calculation of contribution margin ratio,
Hence, contribution margin ratio is 20%.
Product O
Given,
Fixed cost is $1,475,000.
Calculated values,
Contribution margin ratio is 87.5% or 0.875 (from working note).
Formula to calculate break-even point of sales in dollars,
Substitute $1,475,000 for fixed cost and 0.875 for contribution margin ratio.
Working note:
Calculation of selling price per unit,
Calculation of variable cost per unit,
Formula to calculate contribution margin ratio,
Hence, contribution margin ratio is 87.5%.
Hence, break-even point of sale of product T is $625,000 and product O is $1,685,714.28.
2.
To prepare: A
2.

Explanation of Solution
Statement to show the contribution margin income statement
Company H | ||
Income Statement | ||
For the Year Ended December 31, 20XX | ||
Particulars | Product T Amount ($) | Product O Amount ($) |
Sales | 1,200,000 | 1,200,000 |
Less: Variable Cost | 960,000 | 150,000 |
Contribution Margin | 240,000 | 1,050,000 |
Less: Fixed Cost | 125,000 | 1,475,000 |
Pre Tax Income | 115,000 | (425,000) |
Tax | 36,800 | (136,000) |
Net Income | 78,200 | 289,000 |
Working note:
Given,
The numbers of units sold is 30,000.
The selling price is $40 of both products.
Variable cost per unit of product T is $32.
Variable cost per unit of product O is $5.
Calculation of total sales,
The total sales are $1,200,000.
Product T
Calculation of total variable cost,
The total variable cost is $960,000.
Product O
Calculation of total variable cost,
The total variable cost is $150,000.
Product T
Calculation of tax,
`
Product O
Calculation of tax,
`
Hence, the net income of Company H is $78,200 from product T and net loss $136,000 from product O.
3.
To prepare: A
3.

Explanation of Solution
Statement to show the contribution margin income statement,
Company H | ||
Income Statement | ||
For the Year Ended December 31, 20XX | ||
Particulars | Product T Amount ($) | Product O Amount ($) |
Sales | 2,400,000 | 2,400,000 |
Less: Variable Cost | 1,920,000 | 300,000 |
Contribution Margin | 480,000 | 2,100,000 |
Less: Fixed Cost | 125,000 | 1,475,000 |
Pre Tax Income | 355,000 | 625,000 |
Tax | 113,600 | 200,000 |
Net Income | 241,400 | 425,000 |
Working note:
Given,
The numbers of units sold is 60,000.
The selling price is $40 of both products.
Variable cost per unit of product T is $32.
Variable cost per unit of product O is $5.
Calculation of total sales,
The total sales are $2,400,000.
Product T
Calculation of total variable cost,
The total variable cost is $1,920,000.
Product O
Calculation of total variable cost,
The total variable cost is $300,000.
Product T
Calculation of tax,
`
Product O
Calculation of tax,
`
Hence, the net income of Company H is $241,400 from product T and $425,000 from product O.
4.
To identify: The product that would greatly experience loss when sales decreases.
4.

Explanation of Solution
- The product O will experience greater loss when sales decreases.
- Per unit variable cost is low of product O therefore, contribution is highly affected due to decrease in sales.
- Fixed cost is high of product O therefore, when sales highly decrease the product O have to suffer huge losses.
Hence, product that would greatly experience loss when sales decreases is product O as its fixed expenses are higher.
5.
To identify: The factors that might have created the different cost structure for the two products.
5.

Explanation of Solution
The factors that might have created the different cost structure for the two products:
- Labor cost: It may affect the cost structure as it is one of the important parts of total cost it includes the wages paid to the workers.
- Machinery cost: It may affect the cost structure as it is one of the important parts of total cost it includes the cost incurred to install machinery.
- Salary of staff: It may affect the cost structure as it is one of the important parts of total cost it depends on the number of staff working in the organization.
- Raw material cost: It may affect the cost structure as it is one of the important parts of total cost, raw material required may be more or less costly therefore, it also affect a product’s cost.
Hence, raw material cost, salary structure, machinery required etc are the factors that might have created the different cost structure for the two products.
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