Problem 2-27 (Algo) Sales Mix; Break-Even Analysis; Margin of Safety [LO2-7, LO2-9]

Island Novelties, Inc., of Palau makes two productsHawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per unit and annual sales volume are as follows:

	Hawaiian Fantasy	Tahitian Joy
Selling price per unit	$	20		$	110
Variable expense per unit	$	9		$	33
Number of units sold annually		15,000			7,500

Fixed expenses total $660,000 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 $30 each and that has variable expenses of $24 per unit. If the company can sell 25,000 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 companys revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.