Basu Company produces two types of sleds for playing in the snow: basic sled and aerosled. The projected income for the coming year, segmented by product line, follows:
The selling prices are $30 for the basic sled and $60 for the aerosled. (Round break-even packages and break-even units to the nearest whole unit.)
Required:
- 1. Compute the number of units of each product that must be sold for Basu to break even.
- 2. Assume that the marketing manager changes the sales mix of the two products so that the ratio is five basic sleds to three aerosleds. Repeat Requirement 1.
- 3. CONCEPTUAL CONNECTION Refer to the original data. Suppose that Basu can increase the sales of aerosleds with increased advertising. The extra advertising would cost an additional $195,000, and some of the potential purchasers of basic sleds would switch to aerosleds. In total, sales of aerosleds would increase by 12,000 units, and sales of basic sleds would decrease by 5,000 units. Would Basu be better off with this strategy?
1.
Calculate break-even units for basic sled and aerosled.
Answer to Problem 54P
Break-even quantity for basic sled and aerosled are 47,850 units and 19,140 units respectively.
Explanation of Solution
Break-Even Point:
The point or situation where the amount of total cost is equivalent to total revenue is known as the break-even point. It is the point where there is no loss or no profit.
The package of basic sled and aerosled is given below:
Product |
Price ($) A |
Unit Variable Cost ($) B |
Unit Contribution Margin ($) C |
Sales Mix D |
Package Unit Contribution Margin ($) |
Basic sled | 30 | 103 | 20 | 55 | 100 |
Aerosled | 60 | 254 | 35 | 25 | 70 |
Total | 170 |
Table (1)
Use the following formula to calculate break-even quantity:
Substitute $1,626,9006 for total fixed cost and $170 for contribution margin in the above formula.
Therefore, break-even quantity is 9,570 units.
Use the following formula to calculate break-even quantity for basic sled:
Substitute 9,570 units for number of units and 55 for sales mix in the above formula.
Therefore, the break-even quantity for basic sled is 47,850 units.
Use the following formula to compute break-even point for aerosled:
Substitute 9,570 units for number of units and 25 for sales mix in the above formula.
Therefore, the break-even motorcycle helmet is 19,140 units.
Working Note:
1. Calculation of units sold of basic sled:
2. Calculation of units sold of aerosled:
3. Calculation of variable cost per unit for basic sled:
4. Calculation of variable cost per unit for aerosled:
5. Calculation of sales mix:
Ratio for basic sled:
Ratio for aerosled:
The sales mix ratio for basic sled and aerosled is 5:2.
6. Calculation of total fixed cost:
2.
Calculate the break-even units for basic sled and aerosled if the sales mix is 5:3.
Answer to Problem 54P
Break-even quantity for basic sled and aerosled are 39,680 units and 23,808 units respectively.
Explanation of Solution
Break-Even Point:
The point or situation where the amount of total cost is equivalent to total revenue is known as the break-even point. It is the point where there is no loss or no profit.
The package of basic sled and aerosled is given below:
Product |
Price ($) A |
Unit Variable Cost ($) B |
Unit Contribution Margin ($) C |
Sales Mix D |
Package Unit Contribution Margin ($) |
Basic sled | 30 | 103 | 20 | 5 | 100 |
Aerosled | 60 | 254 | 35 | 3 | 105 |
Total | 205 |
Table (1)
Use the following formula to calculate break-even quantity:
Substitute $1,626,9006 for total fixed cost and $205 for contribution margin in the above formula.
Therefore, break-even quantity is 7,936 units.
Use the following formula to calculate break-even quantity for basic sled:
Substitute 7,936 units for number of units and 5 for sales mix in the above formula.
Therefore, the break-even quantity for basic sled is 39,680 units.
Use the following formula to compute break-even point for aerosled:
Substitute 7,936 units for number of units and 3 for sales mix in the above formula.
Therefore, the break-even motorcycle helmet is 23,808 units.
3.
State whether the strategy is profitable.
Explanation of Solution
Particulars | Amount ($) |
Increase in contribution margin of aerosled | 420,0007 |
Decrease in contribution of basic sled | (100,000)8 |
Increase in total contribution margin | 320,000 |
Less: Additional fixed cost | 195,000 |
Increase in income | 125,000 |
Table (1)
The strategy will earn Person B $125,000. Therefore, the strategy is beneficial for Person B.
Working Notes:
7. Calculation of increase in contribution margin of aerosled:
8. Calculation of decrease in contribution margin of basic sled:
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Chapter 7 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
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