Problem 1:
Mugs and More sells a large variety of coffee mugs. Larry Hooper, the owner, is thinking of expanding his sales by hiring local high school students, on a commission basis, to sell coffee mugs bearing the name and mascot of the local high school.
These coffee mugs would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The coffee mugs would cost Mr. Hooper $3 each with minimum order of 50 coffee mugs. Any additional coffee mugs would have to be ordered increments of 50.
Since Mr. Hooper's plan wold not require any additional facilities, the only costs associated with the project would be the costs of the coffee mugs and the costs of the sales commissions. The selling price of the coffee mugs would be $6 each. Mr. Hooper would pay the students a commission of $1 for each mug sold.
Required to do:
1. To make the project worthwhile, Mr. Hooper would require $700 profit for the first three months of the venture. What level of sales in units and in dollars would be required to reach this target net operating income? Show all computations.
2. Assume that the venture is undertaken and an order is placed for 50 coffee mugs. What would be Mr. Hooper's break-even point in units and in sales dollars? Show computations and explain the reasoning behind your answer.
Problem 2:
Jean Leeman & Co. of Texas makes two products, Mini and Giga. Present revenue, cost, and sales data on the two products follow:
MINI GIGA
Selling price per unit $5.00 $60.00
Variable expenses per unit $2.00 $36.00
Number of units sold annually 108,000 9,000
Fixed expenses total $378,000 per year.
Required to do:
1. Assuming the sales mix given above, do the following:
a. Prepare a contribution income statement showing both dollar and percent columns for each product and for the company as a whole.
b. Compute the break-even point in dollars for the company as a whole and the margin of safety in both dollars and percent.
2. The company has just developed a new product, Mega. Assume that the company could sell 36,000 units at $50 each. The variable expenses would be $35 each. The company's fixed expenses would not change.
a. Prepare another contribution income statement , including sales of Mega (sale of the other two products would not change). Carry percentage computations to one decimal place.
b. Compute the company's new break-even point in dollars and the new margin of safety in both dollars and percent.
3. The president of the company examines your figures and say "There's something strange here. Our fixed costs haven't changed and you show greater total contribution margin if we add the new product, but you also show out break-even point going up. With greated contribution margin, the break-even point should go don, not up. You've made a mistake somewhere." Explain to the president what happened.