Question

Handy Home sells window and doors in the ratio of 4:1 (windows: doors). The selling price of each window is $200 and of each door is $500. The variable cost of a window is $125 and of a door is $350. Fixed costs are $900,000.

1. Determine the contribution margin for one composite unit.

2. Compute the break-even point in composite units.

3. Compute the number of units of each product that will be sold at the break-even point.

4. Compute the number of units of each product that needs to be sold to achieve a net income of $180,000.

Answer 1

1. Contribution margin per unit = Selling price per unit - Varaible costs per unit

	Window	Doors
Contribution margin per unit	$75 ($200-$125)	$150 ($500-$350)

Contribution margin for one composite unit = (Window contribution margin per unit * Sales mix) + (Doors contribution margin per unit * Sales mix)

= ($75 * 4/5) + ($150 * 1/5)

= $60 + $30

= $90

2. Break-even in composite units = Fixed costs / Contribution margin for one composite unit

= $900,000 / $90

= 10,000

3. Window = 10,000 * 4/5 = 8,000 units

Doors = 10,000 * 1/5 = 2,000 units

4. Total units = (Fixed costs + Desired income) / Contribution margin for one composite unit

= ($900,000 + $180,000) / $90

= 12,000

Window = 12,000 * 4/5 = 9,600

Doors = 12,000 * 1/5 = 2,400