Question

Decision Making 6-1

Current Designs manufactures two different types of kayaks, rotomoulded kayaks and composite kayaks. The following information is available for each product line.

		Rotomoulded		Composite
Sales price/unit		$910		$1,920
Variable costs/unit		$550		$1,290

The company’s fixed costs are $787,000. An analysis of the sales mix identifies that rotomoulded kayaks make up 80% of the total units sold.

Determine the weighted-average unit contribution margin for Current Designs.

Weighted-average unit contribution margin

$____

Determine the break-even point in units for Current Designs and identify how many units of each type of kayak will be sold at the break-even point. (Round answers to 0 decimal places, e.g. 5,275.)

Break-even Sales

_____units

		Rotomolded Kayaks			Composite Kayaks
Break-even Sales Distribution			____units			____units

Assume that the sales mix changes, and rotomoulded kayaks now make up 70% of total units sold.

Calculate the total number of units that would need to be sold to earn a net income of $1.92 million and identify how many units of each type of kayak will be sold at this level of income. (Round answers to 0 decimal places, e.g. 5,275.)

Required Sales

____units

		Rotomolded Kayaks			Composite Kayaks
Break-even Sales Distribution			____units			____units

Assume that Current Designs will have sales of $3.00 million with two-thirds of the sales dollars in rotomoulded kayaks and one third of the sales dollars in composite kayaks. Assuming $634,000 of fixed costs are allocated to the rotomoulded kayaks and $154,000 to the composite kayaks, prepare a CVP income statement for each product line. (Round answers to 0 decimal places, e.g. 5,275.)

		Rotomolded Kayaks		Composite Kayaks
Pick one: Administrative ExpensesNet Income / (Loss)Fixed CostsSelling ExpensesGross ProfitSalesVariable CostsContribution Margin		$		$
SalesGross ProfitFixed CostsVariable CostsContribution MarginNet Income / (Loss)Selling ExpensesAdministrative Expenses
Contribution MarginFixed CostsSelling ExpensesNet Income / (Loss)Administrative ExpensesGross ProfitVariable CostsSales
SalesSelling ExpensesAdministrative ExpensesVariable CostsContribution MarginGross ProfitFixed CostsNet Income / (Loss)
Selling ExpensesVariable CostsAdministrative ExpensesNet Income / (Loss)SalesContribution MarginGross ProfitFixed Costs		$		$

Calculate the degree of operating leverage for each product line. (Round answers to 2 decimal places, e.g. 52.75.)

		Rotomolded Kayaks		Composite Kayaks
Degree of operating leverage

Answer 1

SOLUTION:

1) weighted-average unit contribution margin for Current Designs

	Rotomoulded	Composite
Selling price per unit	$910	$1920
Less: Variable cost per unit	($550)	($1290)
Contribution per unit	$360	$630
Product Mix	80%	20%
Weighted Average Unit contribution margin	$288	$126		$414

2) break-even point in units for Current Designs:

Fixed cost	$787,000
Weighted Average Unit contribution margin	$414
Breakeven units ($787000/$414)	1900
Rotomoulded (1,900 units × 80%)	1520 units
Composite (1,900 units × 20%)	380 units

3) total number of units that would need to be sold to earn a net income of $1.92 million:

	Rotomoulded	Composite
Selling price per unit	$910	$1920
Less: Variable cost per unit	($550)	($1290)
Contribution per unit	$360	$630
Product Mix	70%	30%
Weighted Average Unit contribution margin	$252	$189		$441

Fixed cost = $787,000

Net Income = $1,920,000

Total no. of units to be sold = $1920000/$441

= 4354 units

Rotomoulded = 4354 70% = 3048

Composite = 4354 30% = 1306