Problem:
MediaSol Inc. Produces affordable, high quality personal mulitmedia entertainment devices. The company's Video Division manufactures three portable video players - the Stnadard, the Deluxe, and the Pro-that are widely used by the younger generation. Selected information on the portable video players is given below:
|
|
|
|
Standard
|
Deluxe
|
Pro
|
|
Selling price per video player
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|
$80
|
$120
|
$180
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|
Variable expenses per video player:
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|
|
|
|
Production
|
|
|
44
|
54
|
63
|
|
Selling (10% of selling price)
|
|
8
|
12
|
18
|
All sales are made through the company's own retail outlets. The Video Division has the following fixed costs:
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|
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Per Month
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|
Fixed production costs
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$90,000
|
|
Advertising expense
|
75,000
|
|
Administrative salaries
|
37,500
|
|
Total
|
|
|
$202,500
|
Sales, in unites, over the past two months have been as follows:
|
Standard
|
Deluxe
|
Pro
|
Total
|
|
April
|
1,000
|
500
|
2,500
|
4,000
|
|
May
|
3,750
|
750
|
1,500
|
6,000
|
Required:
1. Using the contribution approach, prepare an income statement for April and an income statement for May,
With the following headings:
|
Standard
|
Deluxe
|
Pro
|
Total
|
|
April
|
1,000
|
500
|
2,500
|
4,000
|
|
May
|
3,750
|
750
|
1,500
|
6,000
|
Place the fixed expenses only in the Total column. Do not show percentages for the fixed expenses.
2. On seeing the income statements in (1) above, the president stated, "I can't believe this!
We sold 50% more portable video players in May than in April, yet profits went down. It's obvious that costs are out of control in that division." What other explanation can you give for the drop in operating income?
3. Compute the Video Division's break-even point in dollar sales for April.
4. Has May's break-even point in dollar sales gone up or down from April's break-even point? Explain without computing a break-even point for May.
5. Assume that sales of the standard video play increase by $35,000. What would be the effect on operating income? What would be the effect if Pro video player sales increased by $35,000? Do not prepare income statements; use the incremental analysis approach in determining your answer.