Island Novelties, Inc. of Palau makes two products?Hawaiian Fantasy and Tahitian Joy. Present revenue, cost, and sales data on the two products follow:

Fixed expenses total $1,427,400 per year. The Republic of Palau uses the U.S. dollar as its currency.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution margin income statement as in Chapter 8, showing both dollar and percentage 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 both in dollars and as a percentage.

2. Another product, Samoan Delight, has just come on the market. Assume that the company could sell 10,000 units at $135 each. The variable expenses would be $108 each. The company?s fixed expenses would not change.

a. Prepare another contribution margin income statement, including sales of Samoan Delight (sales 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 both in dollars and as a percentage.

3. The president of the company examines your figures and says, ?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 our break-even point going up. With greater contribution margin, the break-even point should go down, not up. You?ve made a mistake somewhere.? Explain to the president what has happened.

Transcribed Image Text:

Hawaiian Fantasy Tahitian Joy $ 300 Selling price per unit 45 Variable expenses per unit 27 60 Number of units sold annually 20,000 5,000