Answer:
Explanation:
1. The overall breakeven sales can be computed by calculating the contribution Margin Ratio Velcro Metal Nylon Total Sales($) 1,65,000 3,00,000 3,40,000 8,05,000 Variable expenses ($) 1,25,000 1,40,000 1,00,000 3,65,000 CM 40,000 1,60,000 2,40,000 4,40,000 Fixed Expenses ($) 4,00,000 Net Operating Income ($) 40,000 CM ratio=Contribution Margin/Sales = 440,000/805,000=0.5466 Dollar sales to Break even=Fixed expenses/CM ratio = 400,000/0.5466=731,800 (approx) 2. The issue is what to do with the common fixed cost when computing the breakevens for the individual products. The correct approach is to ignore common fixed costs. If the common fixed costs are used in the computation the break even points would be overstated for individual projects and mangers may drop projects that are profitable. a). The break even points for each product can be computed using the CM approach Velcro Metal Nylon Unit Selling Price ($) 1.65 1.5 0.85 Variable cost per unit 1.25 0.7 0.25 Unit contribution margin(a)($) 0.4 0.8 0.6 Product fixed expenses(b)($) 20,000 80,000 60,000 Unit sales to break even (b/a) 50000 100000 100000 b). Allocation of common fixed expenses on the basis of sales revenue Velcro Metal Nylon Total Sales($) 1,65,000 3,00,000 3,40,000 8,05,000 Percentage of total sales 20.50% 37.27% 42.24% 100% Allocated common fixed expense($) 49,193 89,441 1,01,366 2,40,000 Product fixed expenses 20,000 80,000 60,000 160000 Allocated common and product fixed expenses
