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1. From all original estimates given, prepare estimated contribution margins by product line for the next fiscal quarter. Also, show the contribution margins per unit.

Product Line Sales Volume Price Variable Cost ContributionMargin/Unit Ratio
Comp. Paper 30,000 $14.00 $6.00 $8.00 57%$8.00*30,000 = $240,000 CM
Napkins 120,000 $ 7.00 $4.50 $2.50 36%$2.50*120,000 = $300,000 CM
Place Mats 45,000 $12.00 $3.60 $8.40 70%$8.40 * 45,000 = $378,000 CM
Poster Board 80,000 $ 8.50 $2.50 $6.00 71%$6.00 * 80,000 = $480,000 CM
Total 275,000


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Sales Proportions CM/Product Weighed CM
Computer Paper 11% * $8.00 = $0.88
Napkins 44% * $2.50 = $1.10
Place Mats 16% * $8.40 = $1.34
Poster Board 29% * $6.00 = $1.74
Total 100% $5.06 weighted CM

 

Total Fixed Costs = $420,000+$118,000 = 538,000

Total Units = $538,000/$5.06 = 106,324 Break Even

 

Product Lines Sales Mix % Total Units # of Products Unit CM CM
Comp. Papers 11% 106,324 11,696 $8.00 $93,568
Napkins 44% 106,325 46,783 $2.50 $116,956
Place Mats 16% 106324 17,012 $8.40 $142,899
Poster Board 29% 106324 30,834 $6.00 $185,003
  1. Prepare contribution margins as in part (1) with all revisions included.
Product Line Sales Volume Price Variable Cost ContributionMargin/Unit Ratio
Comp. Paper 35,000 $14.00 $7.00 $7.00 50%
Napkins 120,000 $ 7.00 $4.50 $2.50 36%
Place Mats 45,000 $12.00 $4.00 $8.00 67%
Poster Board 80,000 $ 8.50 $2.50 $6.00 71%
Total 280,000

 

Sales Proportions CM/Product Weighed CM
Computer Paper 13% * $7.00 = $0.91
Napkins 44% * $2.50 = $1.10
Place Mats 16% * $8.00 = $1.28
Poster Board 29% * $6.00 = $1.74
Total 100% $5.03 weighted CM

 

$538,000/$5.03 = $106,958 Break Even

 

  1. For the original estimates, compute each of the following:
    (a) Break-even point for the given sales mix.

Total Costs / Weighted CM

$538,000/$5.06 = 106,324 Break Even

(b) Margin of safety for the estimated sales volume.

275,000 – 106,324 = 168,676

168,000/275000 = .61 = 61%

  1. For the revised estimates, compute each of the following:
    (a) Break-even point for the given sales mix.

538,000/$5.03 = 106,958 Break Even
(b) Margin of safety for the estimated sales volume.

280,000 – 106958 = 173,042

  1. Comment on Herbert’s concern about the variable cost of the place mats.

Place mats contribution margin (CM) is the second highest of the four products (at $142,899) and has the highest individual contribution margin per unit of the four products ($8.40). Variable costs for place mats is $3.60 rendering a $8.40 CM per unit; if the variable costs were to go up to $5.00 the CM per unit would still be $7.00 per unit ($315,000). These would be a difference of $63,000 dollars ($378,000 – $315,000 = $63,000). Herbert’s concerns about the increasing variable costs of place mats at this time are unfounded.