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Problem 6-27 Sales Mix; Break-Even Analysis; Margin of Safety[LO6-7, LO6-9]

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	$	20		$	100
Variable expense per unit	$	13		$	40
Number of units sold annually		22,000			6,600

Fixed expenses total $506,000 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 $55 each and that has variable expenses of $44 perunit. If the company can sell 10,000 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.