MediaSol Inc. produces affordable, high-quality personal multimedia entertainment devices. The company€™s Video Division manufactures three portable video players€”the Standard, the Deluxe, and the Pro that are widely used by the younger generation. Selected information on the portable video players is given below:

All sales are made through the company€™s own retail outlets. The Video Division has the following fixed costs:
Per Month
Fixed production costs. . . . . . . . . . . . . . . . . . $ 90,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . 75,000
Administrative salaries . . . . . . . . . . . . . . . . . . 37,500
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202,500
Sales, in units, over the past two months have been as follows:

Required:
1. Using the contribution approach, prepare an income statement for April and an income statement for May, with the following headings:

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 said, €œI 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 player 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.

Transcribed Image Text:

Deluxe Pro Standard Selling price per video player... Variable expenses per video player. Production.... Selling (10% of selling price). $120.00 ........ $18000 $80.00 44.00 800 54.00 12.00 63.00 18.00