Problem 6-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO6-7, LO6-9]

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

	Hawaiian Fantasy			Tahitian Joy
Selling price per unit	$	20		$	100
Variable expense per unit	$	13		$	40
Number of units sold annually		22,000			6,600

Fixed expenses total $506,000 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 $55 each and that has variable expenses of $44 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 companys revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.