Question

Garden Supply Company sells only two products, Product G1 and Product G2.

	Product G1	Product G2	Total
Selling price	$36	$59
Variable cost per unit	$28	$43
Total fixed costs			$405,000

Garden Supply sells 4 units of Product G1 for each 3 units it sells of Product G2. Garden Supply has a tax rate of 20%.

Required:

a.   What is the breakeven point in units for each product, assuming the sales mix is 4 units of Product G1 for each 3 units of Product G2?

b.   How many units of each product would be sold if Garden Supply desired an after-tax net income of $385,000, using its tax rate of 20%?

Answer 1

a)

Contribution per unit of Product, G1 = 36 -28 = $8

Contribution per unit of Product G2 = 59 - 43 = $16

Sales mix:

4 units of Product G1 for each 3 units of Product G2

Weighted average contribution per unit = [(4*8) + (3*16)] / 7 = $11.43 (Approximately)

Break Even Point = Fixed cost / Weighted average contribution per unit

= 4,05,000 / 11.43

= 35,433 units (Approximately)

Units Break - up:

Product G1 = 35,433 * 4/7 = 20,247 units (Approximately)

Product G2 = 35,433 * 3/7 = 15,186 units (Approximately)

b)

Desired operating profit = 3,85,000/80*100 = $4,81,250

Units to be sold to earn desired profit = (Fixed cost + Desired profit) / Weighted average contribution per unit

= (4,05,000 + 4,81,250) / 11.43

= 77,537 (Approximately)

Units Break-up:

Product G1 = 77,537 * 4/7 = 44,307 units (Approximately)

Product G2 = 77,537 * 3/7 = 33,230 units (Approximately)