Question

Olongapo Sports Corporation distributes two premium golf balls—Flight Dynamic and Sure Shot. Monthly sales and the contribution margin ratios for the two products follow: Product Flight Dynamic Sure Shot Total Sales $ 710,000 $ 290,000 $ 1,000,000 CM ratio 65 % 75 % ? Fixed expenses total $558,000 per month. Required: 1. Prepare a contribution format income statement for the company as a whole. 2. What is the company's break-even point in dollar sales based on the current sales mix? 3. If sales increase by $50,000 a month, by how much would you expect the monthly net operating income to increase?

Answer 1

Answer:

Instructions are below.

Explanation:

Giving the following information:

Product:

Flight Dynamic= 710,000

Sure Shot= 290,000

Total Sales= $1,000,000

CM ratio 65 % 75 %

Fixed expenses total $558,000 per month.

We will structure the contribution margin income statement:

Sale= 1,000,000

Variable costs= (710,000*0.35) + (290,000*0.25)= (321,000)

Contribution margin= 679,000

Fixed costs= (558,000)

Net operating income= 121,000

Now, we need to determine the sales mix:

Flight Dynamic= 710,000/1,000,000= 0.71

Sure Shot= 290,000/1,000,000= 0.29

Break-even point (dollars)= Total fixed costs / Weighted average contribution margin ratio

Weighted average contribution margin ratio:

Flight Dynamic= 0.71*0.65= 0.4615

Sure Shot= 0.29*0.75= 0.2175

Total= 0.679

Break-even point (dollars)= 558,000/ 0.679

Break-even point (dollars)= $821,796.76

Finally, if sales increase by $50,000

Effect on income= Weighted average contribution margin ratio*increase in sales

Effect on income= 0.679*50,000= $33,950 increase