Island Novelties, Inc., of Palau makes two products-_Hawaiian Fantasy and Tahitian Joy. Each

product's selling price, variable expense per unit and annual sales volume are as follows:

Selling price per unit.-Hawaiian Fantasy-$15 Tahitian Joy-$100

Variable expense per unit-Hawaiian Fantasy-$9. Tahitian Joy-$20

Number of units sold annually.--Hawaiian Fantasy-20,000$. Tahitian Joy-5,000

Fixed Expenses total 475,800 per year

Required:

1

Assuming the sales mix given above, do the following:

a.

Prepare a contribution format income statement showing both dollar and percent columns

for each product and for the company as a whole.

b.

Compute the company's break-even point in dollar sales. Also, compute its margin of

safety in dollars and its margin of safety percentage.

2

The company has developed a new product called Samoan Delight that sells for $45 each and

that has variable expenses of $36 per unit. If the company can sell 10,000 units of Samoan

Delight without incurring any additional fixed expenses:

a.

Prepare a revised contribution format income statement that includes Samoan Delight.

Assume that sales of the other two products does not change.

b.

Compute the company's revised break-even point in dollar sales. Also, compute its

revised margin of safety in dollars and margin of safety percentage.

The president of the company examines your figures and says,

There's something strange

here. Our fixed expenses haven't 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. You've made a mistake

somewhere." Explain to the president what has happened.