Question 7
Thanas Toy Bhd, makes two products, Hawaiian Fantasy andTahitian Joy. Present revenue, cost and sales data for two productsfollow:
Avengers Toy
Madagascar Toy
Selling price per unit
RM15
RM100
Variable expenses per unit
RM9
RM20
Number of units sold monthly
20,000
5,000
Fixed expenses total RM475,800 per year. Required:
a. Assuming the sales mixgiven below above, do the following:
Prepare a contribution format income statement showing bothdollar and percent columns for each product and for the company asa whole.
ii.Compute the break-even point indollars for the company as a whole and the margin of safety in bothdollars and percent.
The company has developed a new product to be called SeafoodToy. Assume that the company could sell 10,000 units at RM45 each.The variable expenses would be RM36 each. The companyâs fixedexpenses would not change.
Prepare another contribution format income statement, includingsales of the Seafood (sales of other two products would notchange).
Compute the companyâs new break-even point in dollars and thenew margin of safety in both dollars and percent.
The president of the company examines your figures and says, âthereâs something strange here, our fixed costs havenât changed andyou show greater total contribution margin if we add the newproduct, but you also show our break-even point going up. Withgreater contribution margin, the break-even point should go down,not up. Youâve made a mistake somewhere.â Explain to the presidentwhat has happened.
Question 7
Thanas Toy Bhd, makes two products, Hawaiian Fantasy andTahitian Joy. Present revenue, cost and sales data for two productsfollow:
Avengers Toy | Madagascar Toy | |
Selling price per unit | RM15 | RM100 |
Variable expenses per unit | RM9 | RM20 |
Number of units sold monthly | 20,000 | 5,000 |
Fixed expenses total RM475,800 per year. Required:
a. Assuming the sales mixgiven below above, do the following:
Prepare a contribution format income statement showing bothdollar and percent columns for each product and for the company asa whole.
ii.Compute the break-even point indollars for the company as a whole and the margin of safety in bothdollars and percent.
The company has developed a new product to be called SeafoodToy. Assume that the company could sell 10,000 units at RM45 each.The variable expenses would be RM36 each. The companyâs fixedexpenses would not change.
Prepare another contribution format income statement, includingsales of the Seafood (sales of other two products would notchange).
Compute the companyâs new break-even point in dollars and thenew margin of safety in both dollars and percent.
The president of the company examines your figures and says, âthereâs something strange here, our fixed costs havenât changed andyou show greater total contribution margin if we add the newproduct, but you also show our break-even point going up. Withgreater contribution margin, the break-even point should go down,not up. Youâve made a mistake somewhere.â Explain to the presidentwhat has happened.
Related questions
Okabee Enterprises is the distributor for two products, ModelA100 and Model B900. Monthly sales and the contribution marginratios for the two products follow: |
Product | |||
| ModelA100 | ModelB900 | Total | |
| Sales | $690,000 | $310,000 | $1,000,000 |
| Contribution marginratio | 63% | 77% | ? |
| The companyâs fixed expensestotal $583,000 per month. |
| Required: | |
| 1. | Prepare a contribution format income statement for the companyas a whole. (Round your percentage answersto 2 decimal places. Input all amounts as positive values exceptlosses which should be indicated by minus sign. Omit the "$" and"%" signs in your response.) |
Model A100 | Model B900 | Total Company | ||||
| Amount | % | Amount | % | Amount | % | |
| (Click to select)Netoperating income (loss)Variable expensesContribution marginFixedexpensesSales | $ | $ | $ | |||
| (Click toselect)Fixed expensesSalesContribution marginNet operating income(loss)Variable expenses | ||||||
| (Click toselect)SalesFixed expensesContribution marginNet operating income(loss)Variable expenses | $ | $ | ||||
| (Click to select)Netoperating income (loss)Contribution marginFixedexpensesSalesVariable expenses | ||||||
| (Click toselect)Fixed expensesVariable expensesSalesNet operating income(loss)Contribution margin | $ | |||||
| 2. | Compute the break-even point in sales for the company based onthe current sales mix. (Do not round intermediatecalculations. Round your answer to the nearest dollar amount. Omitthe "$" sign in your response.) |
| Break-even point insales | $ |
| 3. | If sales increase by $40,000 per month, by how much would youexpect net operating income to increase? (Do not roundintermediate calculations. Round your answer to the nearest dollaramount. Omit the "$" sign in your response.) |
| Net operating income increasesby | $ |
Koontz Company manufactures two models of industrialcomponentsâa Basic model and an Advanced Model. The companyconsiders all of its manufacturing overhead costs to be fixed andit uses plantwide manufacturing overhead cost allocation based ondirect labor-hours. Koontzâs controller prepared the segmentedincome statement that is shown below for the most recent year (heallocated selling and administrative expenses to products based onsales dollars):
| Basic | Advanced | Total | |||||
| Number of units produced andsold | 20,000 | 10,000 | 30,000 | ||||
| Sales | $ | 3,000,000 | $ | 2,000,000 | $ | 5,000,000 | |
| Cost of goods sold | 2,300,000 | 1,350,000 | 3,650,000 | ||||
| Gross margin | 700,000 | 650,000 | 1,350,000 | ||||
| Selling and administrativeexpenses | 720,000 | 480,000 | 1,200,000 | ||||
| Net operating income (loss) | $ | (20,000 | ) | $ | 170,000 | $ | 150,000 |
Direct laborers are paid $20 per hour. Direct materials cost $40per unit for the Basic model and $60 per unit for the Advancedmodel. Koontz is considering a change from plantwide overheadallocation to a departmental approach. The overhead costs in thecompanyâs Molding Department would be allocated based onmachine-hours and the overhead costs in its Assembly and PackDepartment would be allocated based on direct labor-hours. Toenable further analysis, the controller gathered the followinginformation:
| Molding | Assemble and Pack | Total | |||||
| Manufacturing overheadcosts | $ | 787,500 | $ | 562,500 | $ | 1,350,000 | |
| Direct labor hours: | |||||||
| Basic | 10,000 | 20,000 | 30,000 | ||||
| Advanced | 5,000 | 10,000 | 15,000 | ||||
| Machine hours: | |||||||
| Basic | 12,000 | - | 12,000 | ||||
| Advanced | 10,000 | - | 10,000 | ||||
Required:
3. Koontzâs production manager has suggested usingactivity-based costing instead of either the plantwide ordepartmental approaches. To facilitate the necessary calculations,she assigned the companyâs total manufacturing overhead cost tofive activity cost pools as follows:
| Activity Cost Pool | Activity Measure | Manufacturing Overhead | ||
| Machining | Machine-hours inMolding | $ | 417,500 | |
| Assemble and pack | Direct labor hours in Assembleand Pack | 282,500 | ||
| Order processing | Number of customer orders | 230,000 | ||
| Setups | Setup hours | 340,000 | ||
| Other (unused capacity) | 80,000 | |||
| $ | 1,350,000 | |||
She also determined that the average order size for the Basicand Advanced models is 400 units and 50 units, respectively. Themolding machines require a setup for each order. One setup hour isrequired for each customer order of the Basic model and three hoursare required to setup for an order of the Advanced model.
The company pays a sales commissions of 5% for the Basic modeland 10% for the Advanced model. Its traceable fixed advertisingcosts include $150,000 for the Basic model and $200,000 for theAdvanced model. The remainder of the companyâs selling andadministrative costs are organization-sustaining in nature.
Using the additional information provided by the productionmanager, calculate:
a. An activity rate for each activity cost pool.
b. The total manufacturing overhead cost allocated to the Basicmodel and the Advanced model using the activity-based approach.
c. The total selling and administrative cost traced to the Basicmodel and the Advanced model using the activity-based approach.
4. Using your activity-based cost assignments from requirement3, prepare a contribution format segmented income statement that isadapted from Exhibit 7-8. (Hint: Organize all of the companyâscosts into three categories: variable expenses, traceable fixedexpenses, and common fixed expenses.)
5. Using your contribution format segmented income statementfrom requirement 4, calculate the break-even point in dollar salesfor the Advanced model.
