Question

6.The company called ALOR is a commercial firm. It sells three products A, B and C. The forecasts data for the next accounting period are the following: UNIT SALES SELLING | ACQUISITION |COMMERCIAL PRODUCTS (units) A1 PRICE (E/unit) 0,000 6,7504.050 5,625 5,625 COST (E/unit) COST (%/revenues) 10% 4% 2% 8,000 20,000 2,587.5 3,262.5 We know that the fixed costs amount to a total of 78.000,000 of which 22,0000,000 are traceable and direct to product A and 12,000,000 direct traceable relate to product B, and 5,000,000 are traceable and direct to product C, while the remaining costs are common fixed costs for the company Required: 1. Prepare the Segmented Income Statement Report (Showing each product and the whole company) 2. Calculate the global breakeven point and break it down for each product in Revenues. 3. Assuming that the sales mix doesn't change, calculate the total revenues (Showing each product and the whole company) needed to obtain a target operating income of e 19,500,000 4. Calculate the critical points of each product and, based on this, decide if it would be convenient to continue commercialising the three products. Justify your answer. 5. Assuming that the total revenues provided at the required number 1 doesn't change (€225,000,000), the % of variable cost doesn't change, the total fixed cost remain equal and the new sales mix is 30%, 30% and 40% for A, B and C, respectively. Prepare the new Segmented Income Statement Report (Showing each product and the whole company) and comment the impact this fact has on operating income. Note: If you find it convenient, you can express calculations in millions of euros.

Answer 1

1..	A	B	C	Total
Unit sales	10000	8000	20000
Unit selling price	6750	5625	5625
Sales $	67500000	45000000	112500000	225000000
Less: Acquistion costs	40500000	20700000	65250000	126450000
Less: Commercial cost	6750000	1800000	2250000	10800000
Contribution	20250000	22500000	45000000	87750000
Less:Traceable fixed costs	22000000	12000000	5000000	39000000
Segmented Income	-1750000	10500000	40000000	48750000
Less: Common fixed costs				39000000
Net Income				9750000

Workings for Global break-even point:
2..	A	B	C
1.Unit sales	10000	8000	20000
Per unit
2.Selling price	6750	5625	5625
3.Acquisition cost	4050	2587.5	3262.5
4.Commercial cost(%*S.P)	675	225	112.5
5.Marginal contribution /unit(2-(3+4))	2025	2812.5	2250
6.Total contribution(5*1)	20250000	22500000	45000000	87750000
7.Traceable Fixed costs	22000000	12000000	5000000	39000000
8.Segmented net income(6-7)	-1750000	10500000	40000000	48750000
9.Common fixed costs				39000000
10.Net Income(8-9)				9750000
	A	B	C	Total
1.Unit sales	10000	8000	20000	38000
Per unit
2.Selling price	6750	5625	5625
3.Acquisition cost	4050	2587.5	3262.5
4.Commercial cost(%*S.P)	675	225	112.5
5.Marginal contribution /unit(2-(3+4))	2025	2812.5	2250
6. Sales mix %( Sales units/Total sales units)	26%	21%	53%
7. 5*6	533	592	1184
8. Wt. av. Contribution (Sum of Row. 7)	2309
Global BEP=Total fixed costs/Wt. av. Contribution per unit
78000000/2309=
33781
units
No.of units at the Global Break-even point:
Sales mix %( Sales units/Total sales units)	26%	21%	53%
1.Sales Units= Global BEP*Sales mix %	8783	7094	17904
2.Selling price/unit	6750	5625	5625
Total sales/revenues $ at BEP(1*2)	59285405	39903638	100709181	199898224

3..

Target Sales in units=(Fixed costs+Target operating income)/Wt. av. Cont. Margin *Sales mix %

Target Sales in units (A)=(78000000+19500000)/2309 *26 %= 10979 units

Target Sales in units (B)=(78000000+19500000)/2309 *21 %= 8867 units

Target Sales in units (C)=(78000000+19500000)/2309 *53%= 22380 units

Target revenues
A-- 10979*6750=	74108250
B-- 8867*5625=	49876875
C--22380*5625=	125887500
Total revenues	249872625

Target opg. Income-19500000	A	B	C	Total
Unit sales	10979	8867	22380
Unit selling price	6750	5625	5625
Sales $	74108250	49876875	125887500	249872625
Acquistion costs	44464950	22943363	73014750	140423063
Commercial cost	7410825	1995075	2517750	11923650
Contribution	22232475	24938438	50355000	97525913
Traceable fixed costs	22000000	12000000	5000000	39000000
Segmented Income	232475	12938438	45355000	58525913
Common fixed costs				39000000
Net Income(subject to Rounding-off error)				19525913

4. Critical point of the 3 products:
	A	B	C
Marginal contribution/unit(as in 2.)	2025	2812.5	2250
Traceable Fixed costs	22000000	12000000	5000000
Individual BEP/Critical point(in units)--Fixed costs/Marginal contribution	10864	4267	2222
Product B & C 's critical/BE point are well below the current sales volume & hence are contributing to their own as well as overall fixed costs.
Whereas,
Product A 's Critical point is above the current sales level --hence it is not meeting its own fixed costs , leave alone contributing to overall fixed costs.
So, the company will benefit by commercialising more of B & C.

5....	A	B	C	Total
Unit sales	11400	11400	15200	38000
Unit selling price	6750	5625	5625
Sales $	76950000	64125000	85500000	226575000
Acquistion costs	46170000	29497500	49590000	125257500
Commercial cost	7695000	2565000	1710000	11970000
Contribution	23085000	32062500	34200000	89347500
Traceable fixed costs	22000000	12000000	5000000	39000000
Segmented Income	1085000	20062500	29200000	50347500
Common fixed costs				39000000
Net Income				11347500
Impact on Operating Income:
Net Income increases by				1597500
Segmented income increases by	2835000	9562500	-10800000
Per-unit workings for 5.. Above	A	B	C
1.Unit sales	11400	11400	15200	38000
Per unit
2.Selling price	6750	5625	5625
3.Acquisition cost	4050	2587.5	3262.5
4.Commercial cost(%*S.P)	675	225	112.5
5.Marginal contribution /unit(2-(3+4))	2025	2812.5	2250
6.Total contribution(5*1)	23085000	32062500	34200000	89347500
7.Traceable Fixed costs	22000000	12000000	5000000	39000000
8.Segmented net income(6-7)	1085000	20062500	29200000	50347500
9.Common fixed costs				39000000
10.Net Income(8-9)				11347500