Florida Favorites Company produces toy alligators and toy dolphins. Fixed costs are $1,290,000 per year. Sales revenue and variable costs per unit are as follow:
Alligators Dolphins
Sales Price $20 $25 Variable Costs 8 10
Questions:
A. Suppose the company currently sells 140,000 alligators per year and 60,000 dolphins per year. Assuming the sales mix stays constant how many alligators and Dolphins must the company sell to break even?
B. Suppose the company currently sells 60,000 alligators per year and 140,000 dolphins per year. Assuming the sales mix stays constant, how many alligators and dolphins must the company sell to break even per year?
C. Explain why the total number of toys needed to break even in (a) is the same as or different from the number in (b).
Solution: A
|Units |140000 |60000 | 200000 | |Sales price per unit |$20 |$25 | | |Variable Cost per unit |$8 |$10 | | | |Alligators |Dolphins |TOTAL | |Sales(A) |$2,800,000 |$1,500,000 |$4,300,000 | |Variable cost(B) |$1,120,000 |$600,000 |$1,720,000 | | | | |
| |Contribution Margin (A-B) |$1,680,000 |$900,000 |$2,580,000 | |Less :Fixed cost | | |$1,290,000 | |Net income | | |$1,290,000 |
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Weighted Average Contribution margin: Total Contribution / Total units = $2580000/200000 = $12.90 Breakeven Point = Fixed Cost / Weighted Average Contribution = $1,290,000 / $12.90
= 100000 units
Allocating TOTAL UNITS to each product based on EXPECTED UNITS PROPORTION= 14:6 Alligators to be produced for Breakeven =100000*14/20
= 70000 units Dolphins to be produced for Breakeven =100000*6/20
= 30000 units
So, Florida Favorites Company has to produce 70000 toy alligators and 30000 toy dolphins for breakeven.
B.
|Units |60000 |140000 | 200000 | |Sales price per unit |$20 |$25 | | |Variable Cost per unit |$8 |$10 | | | |Alligators |Dolphins |TOTAL | |Sales(A) |$1,200,000 |$3,500,000 |$4,700,000 | |Variable cost(B) |$480,000 |$1,400,000 |$1,880,000 | |Contribution Margin(A-B) |$720,000 |$2,100,000 |$2,820,000 | |Less :Fixed cost | | |$1,290,000 | |Net income | | |$1,530,000 |
Weighted Average Contribution margin: Total Contribution / Total units = $2820000/200000 = $ 14.10 Breakeven Point = Fixed Cost / Weighted Average Contribution = $1,290,000 / $14.10
= 91489 units
Allocating TOTAL UNITS to each product based on EXPECTED UNITS PROPORTION
= 6:14 Alligators to be produced for Breakeven
=91489*6/20
= 27446 units Dolphins to be produced for Breakeven
=91489*14/20
= 64042 units
So, Florida Favorites Company has to produce 27446 toy alligators and 64042 toy dolphins for breakeven.
C. The total number of toys needed to break even in (a) is different from the number in (b) and lower also. This is due to the reason as weighted contribution per unit has increased; fixed cost spreads over greater number of dollars letting the breakeven to be achieved early. Perhaps (b) sales mix is more efficient and gives the firm a hint to produce toy dolphins more as contribution per unit of a toy dolphin is also higher.
