Question

Carlyle Lighting Products produces two different types of lamps: a floor lamp and a desk lamp.

Floor lamps sell for $30 and desk lamps sell for $20.

The projected income statement for the upcoming year follows:

Sales                                  $600,000

Less: Variable costs            400,000

Contribution margin            200,000

Less: Fixed costs                 150,000

Operating income                $50,000

The owner of Carlyle’s estimates that 60 percent of the sales revenues will be produced by floor lamps and the remaining 40 percent by desk lamps.

Floor lamps are also responsible for 60 percent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the floor lamp product line.

Required:

1. Compute the sales revenue that must be earned for Carlyle to break even.

2. Compute the number of floor lamps and desk lamps that must be sold for Carlyle to break even.

Answer 1

1. SALES REVENUE THAT MUST BE EARNED FOR CARLYLE TO BREAK EVEN

Break-even point = Fixed Cost / Contribution margin ratio

Contribution margin ratio = Contribution / Sales * 100

Contribution margin ratio = $200,000 / $600,000 * 100 = 33.3333%

Fixed cost = $150,000

Break-even point = $150,000 / 33.3333% = $450,000

2. NUMBER OF FLOOR LAMPS AND DESK LAMPS THAT MUST BE SOLD FOR CARLYLE TO BREAK EVEN

Floor Lamps

Break even revenue = $450,000 * 60% = $270,000

Selling Price = $30

Break even point = $270,000 / $30 = 9,000 floor lamps

Desk Lamps

Break even revenue = $450,000 * 40% = $180,000

Selling Price = $20

Break even point = $180,000 / $20 = 9,000 Desk lamps

All the best...