Sales Mix; Break-Even Analysis; Margin of Safety [LO7, LO9]

Puleva Milenario SA, a company located in Toledo, Spain, manufactures and sells two models of luxuriously finished cutlery—Alvaro and Bazan. Present revenue, cost, and unit sales data for the two products appear below. All currency amounts are stated in terms of euros, which are indicated by the symbol € .

Fixed expenses are €660 per month.
Required:
1. Assuming the sales mix above, do the following:

a. Prepare a contribution format income statement showing both euro and percent columns for each product and for the company as a whole.

b. Compute the break-even point in euros for the company as a whole and the margin of safety in both euros and percent of sales.
2. The company has developed another product, Cano, that the company plans to sell for €8 each. At this price, the company expects to sell 40 units per month of the product. The variable expense would be €6 per unit. The company’s fixed expenses would not change.

a. Prepare another contribution format income statement, including sales of Cano (sales of the other two products would not change).

b. Compute the company’s new break-even point in euros for the company as a whole and the new margin of safety in both euros and percent of sales.
3. The president of the company was puzzled by your analysis. He did not understand why the break-even point has gone up even though there has been no increase in fixed expenses and the addition of the new product has increased the total contribution margin. Explain to the president what has happened.

Transcribed Image Text:

Selling price per unit... Variable expenses per unit Number of units sold monthly. Alvaro Bazan 4.00 6.00 2.40 1.20 200 units 80 units