PROBLEM $5-27$ Sales Mix; Break$-$Even Analysis; Margin of Safety $$ LO$5-5,(\frac{\frac{?}{?}}{?}$ LO$5-9$

Island Novelties, Inc., of Palau makes two products$-$Hawaiian Fantasy and Tahitian Joy. Each product's selling price, variable expense per

unit, and annual unit sales are as follows:

Fixed expenses total $$475,800$ per year.

Required:

Assuming the sales mix given above:

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.

The company has developed a new product called Samoan Delight that sells for $$45$ each and has variable expenses of $$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 sales of the other two products do 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

happened.