Critical Thinking Example Island Novelties, Inc , of Palau makes two products, Hawaiian Fantasy and Tahitian Joy Present revenue, cost, and sales data on the two products follow Hawaiian Fantasy Tahitian Joy Selling price per unit $15 $100 Variable expenses per unit 9 20 Number of units sold annually 20,000 5,000 Fixed expenses total $475,800 per year The Republic of Palau uses the U S dollar as its currency REQUIRED Assuming the sales mix given above, do the following Prepare a contribution income statement showing both dollar and percent columns for each product and for the company as a whole Compute the break even point in dollars for the company as a whole and the margin of safety in both dollars and percent Another product, Samoan Delight, has just come onto the market Assume that the company could sell 10,000 units at $45 each The variable expenses would be $36 each The company's fixed expenses would not change Prepare another contribution income statement, including sales of the Samoan Delight (sales of the other two products would not change) Carry percentage computations to one decimal place Compute the companys new break even point in dollars and the new margin of safety in both dollars and percent The president of the company examines your figures and says, Theres something strange here Our fixed costs havent changed and you show greater total contribution margin if we add the new product, but you also show our break even point going up With greater contribution margin, the break even point should go down, not up Youve made a mistake somewhere Explain to the president what has happened

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Critical Thinking Example Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data on the two

Critical Thinking Example

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data on the two products follow:

Hawaiian Fantasy Tahitian Joy

Selling price per unit $15 $100

Variable expenses per unit 9 20

Number of units sold annually 20,000 5,000

Fixed expenses total $475,800 per year. The Republic of Palau uses the U.S. dollar as its currency.

REQUIRED

Assuming the sales mix given above, do the following:

Prepare a contribution income statement showing both dollar and percent columns for each product and for the company as a whole.
Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percent.

Another product, Samoan Delight, has just come onto the market. Assume that the company could sell 10,000 units at $45 each. The variable expenses would be $36 each. The company's fixed expenses would not change.

Prepare another contribution income statement, including sales of the Samoan Delight (sales of the other two products would not change). Carry percentage computations to one decimal place.
Compute the companys new break-even point in dollars and the new margin of safety in both dollars and percent.

The president of the company examines your figures and says, Theres something strange here. Our fixed costs havent changed and you show greater total contribution margin if we add the new product, but you also show our break-even point going up. With greater contribution margin, the break-even point should go down, not up. Youve made a mistake somewhere. Explain to the president what has happened.