Question 1 (2 points)
The Hansen Company has 3 product lines of tires - X, Y, and Z with contribution margins of $3, $5, and $7 respectively. Management expects a sales mix as follows:
90,000 units of tire X, 60,000 units of tire Y, and 50,000 tires of Z in September 2009.
Hansen's fixed costs are expected to be $552,000 for the same month.
1. Determine the breakeven point in units for X, Y, and Z respectively
2. Determine the operating income at a total sales level 300,000 tires (Ignore taxes)
First, determine the ratio of sales of each product line to the total sales. Total sales is
90,000 + 60,000 + 50,000 = 200,000. Therefore, X is .45 of total sales, Y = .30 of total sales, and Z is .25 of total sales. If the break even units is Q, then, we can determine that (.45Q x $3) + (.30Q x $5) + (.25Q x $7) = $552,000 (since at breakeven, contribution margin is equal to fixed costs). Therefore, Q = 120,000 which means that the total number of units to break even is 120,000. Thus, the breakeven for product X is = .45Q = 54,000; the breakeven for product Y is = .30Q = 36,000; and, the breakeven for product Z is = .25Q = 30,000.
At a total sales of 300,000 tires, sales of X = .45 x 300,000 = 135,000; sales of Y =
.30 x 300,000 = 90,000; and, sales of Z = .25 x 300,000 = 75,000. Therefore, total contribution margin is [(135,000 x $3) + (90,000 x $5) + (75,000 x $7)] = $1,380,000.
To determine operating income, deduct fixed costs from contribution margin, i.e.
$1,380,000 - 552,000 = $828,000.
Question 2 (1 point)
During May, sales for a certain product were $360,000 with total fixed costs of
$162,000 and variable costs of 40% of sales.
1. Determine the dollar sales needed to achieve a target income of $27,000 in June.
Sales - Variable Costs - Fixed Costs = Net Income or, X - 0.40X - $162,000 = $27,000
or, X = $315,000
Note: Sales of $360,000 in May is irrelevant information.