Chapter 5, Problem 12E

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:

1. Prepare a contribution format income statement for the company as a whole. Carry computations to one decimal place.
2. What is the company's break-even point in dollar sales based on the current sales mix?
3. 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?

To determine

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

  $\begin{array}{l}*1)Contributionmarginratio =\frac{Contributionmargin}{Salesrevenue}\hfill \\ \left(FightDynamic\right) \hfill \\ 0.80 =\frac{Contributionmargin}{\$150,000}\hfill \\ =\$150,000*0.80\hfill \\ =\$120,000\hfill \end{array}$

  $\begin{array}{l}Break-evenpointindollarsales=\frac{FixedExpenses}{Contributionmarginratio}\hfill \\ =\frac{\$183,750}{0.525}\hfill \\ =\$350,000\hfill \end{array}$

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.

Conclusion

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.