A company sells two products: a standard model and a deluxe model. The standard model sells for $50 and has a contribution margin ratio of 40%. The deluxe model sells for $100 and has a contribution margin ratio of 50%. Last year, the company sold 5000 standard units and 2500 deluxe units.

There is $200,000 of cost that is "fixed" in the sense that it does not vary with the number of units produced. However, $100,000 of this cost is Direct Fixed Costs that are allocated between products as 80% to the deluxe product, while 20% is allocated to the standard model. The remaining $100,000 is Allocated Fixed Costs that are allocated equally between the two products.

1. In the space below, complete the following segmented income statement to calculate profit by product-line and for the overall company.

Standard Deluxe Total___

Sales

VariableCost_____________________________________________________________

Contribution Margin

Direct Fixed Costs________________________________________________________

Segment Margin

Allocated Fixed Costs_____________________________________________________

Pre-Tax Profit

2. If the sales mix stays the same as last year, how many standard and deluxe units would have to be sold next year in order to earn $42,000 after taxes of 40%?

3. If the sales mix stays the same as last year, what sales from standard and deluxe models would have to be in order to earn $42,000 after taxes of 40%?

4. Assume that the company decided to eliminate the deluxe model with the hope of increasing their profit by $5,000. Once again, they were disappointed to find that their expected results did not materialize. In the space below, compute the effect on profit of eliminating the deluxe model and briefly explain the flaw in the company's plan.

Answer rating: 100% (QA)

1 Segmented Income Statement Standard Deluxe Total Sales 250000 250000 500000 Variable Cost 150000 1... View the full answer