PROBLEM 425 Sales Mix; Multi-Product Break-Even Analysis; Target Profit; Margin of Safety [LO6, LO7, LO9] Warm Hands, a small company based in Prince Edward Island, manufactures and sells two types of lightweight gloves for runnersWarm and Cozy. Current revenue, cost, and unit sales data for the two products appear below:

Warm

Selling price per pair . . . . . . . . . . . . . . . . . . $8.00 Variable expenses per pair . . . . . . . . . . . . . $2.00 Number of pairs sold monthly . . . . . . . . . . 600 units

Fixed expenses are $2,250 per month.

Required: 1. Assuming the sales mix above, do the following: a. Prepare a contribution format income statement showing both dollars and percentage columns for each product and for the company as a whole.

b. Compute the break-even point in sales dollars for the company as a whole and the margin of safety in both dollars and percentage of sales.

c. Compute the break-even point in units for the company as a whole and the margin of safety in both units (pairs of gloves) and percentage of sales.

d. Compute how many pairs of gloves must be sold overall if the company wants to make an af-ter-tax target profit of $4,725 and the tax rate is 30%. Assume that the sales mix remains the same as shown above.

2. The company has developed another type of gloves that provide better protection in extreme cold, Toasty, which the company plans to sell for $20 per pair. At this price, the company expects to sell 200 pairs per month of the product. The variable expense would be $16 per pair. The companys fixed expenses would not change. a. Prepare another contribution format income statement, including sales of Toasty (sales of the other two products would not change).

b. Compute the companys new break-even point in sales dollars for the company as a whole and the new margin of safety in both dollars and percentage of sales.

3. The president of the company is puzzled by your analysis. He does 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 CM. Explain to the president what happened.