Question

The Lifestyle Company (TLC) is considering whether launch the following 2 new products.

• Product Red
• Product Blue

Expected price and cost data for the two types of products are as follows.

	Red	Blue
Selling price	$100	$50
Variable Manufacturing Cost	$8.00	$3.00
Variable Non Manufacturing Cost	$3.50	$1.50

Fixed cost to manufacture both products is $300,000. The expected sales mix of Red and Blue: for every 35 units that TLC sells, 5 units would be from selling Red while 30 units would be from selling Blue.   

Assuming TLC operates in a way that is consistent with all the relevant Cost-Volume-Profit assumptions, the number of units of Red and Blue it needs to sell to break-even are closest to:

Group of answer choices

1,110 Red and 6,660 Blue

830 Red and 5,000 Blue

1,200 Red and 6,500 Blue

860 Red and 5,155 Blue

800 Red and 4,800 Blue

Answer 1

Sales mix = Red : Blue

= 5 : 30

= 1 : 6

	Red	Blue
Selling price per unit	100	50
variable manufacturing cost	8	3
Variable Non Manufacturing Cost	3.5	1.5
Variable cost per unit	11.5	4.5
Contribution margin per unit	88.5	45.5

Weighted average Contribution margin per unit = Contribution margin per unit of Red x Sales mix proportion of Red + Contribution margin per unit of Blue x Sales mix proportion of Blue

= 88.5 x 1/7 + 45.5 x 6/7

= 12.45 + 39

= $51.45

Break even point = Fixed cost/Weighted average Contribution margin per unit

= 300,000/51.45

= 5,830 units

Break even Quantity of Red = Break even point x Sales mix proportion of Red

= 5,830 x 1/7

= 830 units

Break even Quantity of Blue = Break even point x Sales mix proportion of Blue

= 5,830 x 6/7

= 5,000 units

Second option is correct