Question

2. Futurist Enterprises have secured a loan and intend to use some of the proceeds to introduce various aged items to their product range in 2021. They have provided the following information relating to its planned activities. 2 years old I year old 3 years old Sales mix 40,000 40,000 20,000 $40 $12 $16 Selling price Variable cost/unit 10 12 20 Total fixed cost = $180,300 Required Calculate the contribution margin, sales mix and weighted average contribution a. margin for each product. Also calculate the break-even point in total units and units per product based on the provided 2021 data. (8 marks) b. Management is concerned about competition for some of its products, and wants to alter its sales mix. This initiative would increase annual fixed costs by $25 000 and alter the sales mix to 30 percent for the one year old product, 40 per cent for the two year old product and 30 per cent for the three years old product. Required On the available data, would you recommend the initiative? Show all workings. (7 marks)

Answer 1

Total 1 year old 40,000 $12 a) Sales mix 2 years old 3 years old 100,000 [40000 + 40000 + 20000] 40,000 20,000 $40 $20 Selling price per unit Variable cost per unit $16 $10 $12 Therefore, $2 $4 $20 [1 year old=$12-$10=$2; 2 years old=$16-$12=$4; 3 years old=$40-$20=$20] Contribution margin per unit Sales mix 20% [1 year old=40000/100000=40%; 2 years old=40000/100000=40%; 3 years old=20000/100000=20%] $4.0 [1 year old=$2x40%=$0.8; 2 years old=$4x40%=$1.6; 3 years old=$20x20%=$4.0] 40% 40% $0.8 $1.6 Weighted average contribution margin Break-even point in total units = Total fixed costs / Total weighted average contribution margin per unit Total fixed costs $180,300 $6.4 [$0.8 + $1.6 + $4.0] 28,172 [$180300 / $6.4] Total weighted average contribution margin per unit Break-even point in total units Break-even point in units for 1 year old Break-even point in units for 2 years old Break-even point in units for 3 years old 11,269 [28172 x 40%] 11,269 [28172 x 40%] 5,634 [28172 x 20%]

1 year old b) Contribution margin per unit 2 years old $2 3 years old $4 $20 [1 year old=$12-$10=$2; 2 years old=$16-$12=$4; 3 years old=$40-$20=$20] 30% [Given] $6.0 [1 year old=$2x30%=$0.6; 2 years old=$4x40%=$1.6; 3 years old=$20x30%=$6.0] Sales mix 30% 40% $0.6 $1.6 Weighted average contribution margin Break-even point in total units = Total fixed costs / Total weighted average contribution margin per unit $205,300 [180300 + $25000 --> As fixed cost is increased by $25000] $8.2 [$0.6 + $1.6 + $6.0] 25,037 [$205300 / $8.2] Total fixed costs Total weighted average contribution margin per unit Break-even point in total units Break-even point in units for 1 year old Break-even point in units for 2 years old Break-even point in units for 3 years old 7,511 [25037 x 30%] 10,015 [25037 x 40%] 7,511 [25037 x 30%] Conclusion: The initiative is recommended because it reduces the breakeven number of units. That is, when break-even number of units is reduced, firm can start earning confirmed profit earlier immediately after breakeven number of units is reached.