Chapter 6, Problem 6.CD

CURRENT DESIGNS

Current Designs manufactures two different types of kayaks, rotomolded kayaks and composite kayaks. The following information is available for each product line.

	Rotomolded	Composite
Sales price/unit	$950	$2,000
Variable costs/unit	$570	$1,340

The company’s fixed costs are $820,000. An analysis of the sales mix identifies that rotomolded kayaks make up 80% of the total units sold.

Instructions

(a) Determine the weighted-average unit contribution margin for Current Designs.

(b) Determine the break-even point in units for Current Designs and identify how many units of each type of kayak will be sold at the break-even point. (Round to the nearest whole number.)

(c) Assume that the sales mix changes, and rotomolded kayaks now make up 70% of total units sold. Calculate the total number of units that would need to be sold to earn a net income of $2,000,000 and identify how many units of each type of kayak will be sold at this level of income. (Round to the nearest whole number.)

(d) Assume that Current Designs will have sales of $3,000,000 with two-thirds of the sales dollars in rotomolded kayaks and one-third of the sales dollars in composite kayaks. Assuming $660,000 of fixed costs are allocated to the rotomolded kayaks and $160,000 to the composite kayaks, prepare a CVP income statement for each product line.

(e) Using the information in part (d), calculate the degree of operating leverage for each product line and interpret your findings. (Round to two decimal places.)