Problem $3.$ Sales Mix; Break$-$Even Analysis; Margin of Safety

Island Novelties, Inc., of Palau makes two products, Hawaiian Fantasy and Tahitian

Joy. Present revenue, cost, and sales data for the two products follow:

Fixed expenses total $$270,000$ per year. The Republic of Palau uses the U$.$S$.$ dollar as

its currency.

Required:

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 break$-$even point in dollars for the company as a whole and the

margin of safety in both dollars and percent.

The company has just developed a new product to be called Samoan Delight.

Assume that the company could sell $12,000$ units at $$17\mathrm{.}50$ each. The variable

expenses would be $$14\mathrm{.}00$ each. The company's fixed expenses would not change.

a$.$ Prepare another contribution format income statement, including sales of the

Samoan Delight $($sales of the other two products would not change$).$

b$.$ Compute the company's 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, "There's

something strange here. Our fixed costs 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.