Multiple-Product Analysis, Changes in Sales Mix, Sales to Earn Target Operating Income
Response to the following problem:
Basu Company produces two types of sleds for playing in the snow: basic sled and aerosled. The projected income for the coming year, segmented by product line, follows:
|
Basic Sled
|
Aerosled
|
Total
|
|
Sales
|
$3,000,000
|
$2,400,000
|
$5,400,000
|
|
Total variable cost
|
1,000,000
|
1,000,000
|
2,000,000
|
|
Contribution margin
|
$2,000,000
|
$1,400,000
|
$3,400,000
|
|
Direct fixed cost
|
778,000
|
650,000
|
1,428,000
|
|
Product margin
|
$1,222,000
|
$ 750,000
|
$1,972,000
|
|
Common fixed cost
|
|
|
198,900
|
|
Operating income
|
|
|
$1,773,100
|
The selling prices are $30 for the basic sled and $60 for the aerosled.
Required:
1. Compute the number of units of each product that must be sold for Basu to break even.
2. Assume that the marketing manager changes the sales mix of the two products so that the ratio is five basic sleds to three aerosleds. Repeat Requirement 1.
3. CONCEPTUAL CONNECTION
Refer to the original data. Suppose that Basu can increase the sales of aerosleds with increased advertising. The extra advertising would cost an addi- tional $195,000, and some of the potential purchasers of basic sleds would switch to aero- sleds. In total, sales of aerosleds would increase by 12,000 units, and sales of basic sleds would decrease by 5,000 units. Would Basu be better off with this strategy?