Problem 5-27 Sales Mix; Break-Even Analysis; Margin of Safety[LO5-7, LO5-9]
Island Novelties, Inc., of Palau makes two products—HawaiianFantasy and Tahitian Joy. Each product's selling price, variableexpense per unit and annual sales volume are as follows:
| Hawaiian Fantasy | Tahitian Joy |
| Selling price per unit | $ | 30 | | $ | 125 | |
| Variable expense per unit | $ | 21 | | $ | 25 | |
| Number of units sold annually | | 10,000 | | | 5,600 | |
|
Fixed expenses total $565,500 per year.
Required:
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution format income statement showing bothdollar and percent columns for each product and for the company asa whole.
b. Compute the company's break-even point in dollar sales. Also,compute its margin of safety in dollars and its margin of safetypercentage.
2. The company has developed a new product called Samoan Delightthat sells for $50 each and that has variable expenses of $35 perunit. If the company can sell 20,000 units of Samoan Delightwithout incurring any additional fixed expenses:
a. Prepare a revised contribution format income statement thatincludes Samoan Delight. Assume that sales of the other twoproducts does not change.
b. Compute the company’s revised break-even point in dollarsales. Also, compute its revised margin of safety in dollars andmargin of safety percentage.
