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Pin Cushion Company produces two models of sewing basket. Information about Pin Cushion?s...

Question:

Pin Cushion Company produces two models of sewing basket.

Information about Pin Cushion's products is given below:

Product A Product B
Sales revenue $44,000 $59,000
Less: Variable costs 17,800 26,200
Contribution margin 26,200 32,800 l
Total units sold 1,100 2,140

Pin Cushion's fixed costs total $40,000.

Required:

1. Determine Pin Cushion's weighted-average unit contribution margin and weighted average contribution margin ratio.

(Round your answers to 2 decimal places.)

2. Calculate Pin Cushion's break-even units and break-even sales revenue.

(Round your "Sales Units" answer to the nearest whole number and "Sales Revenue" answer to 2 decimal places.)

3. Calculate the number of units of each product that must be sold to break even.

(Round your intermediate calculations to 2 decimal places and final answer to nearest whole number.)

4. Calculate the total sales necessary for Pin Cushion to earn a profit of $66,400.

(Round your answers to 2 decimal places.)

5. Calculate the sales revenue generated from each product line if Pin Cushion earns its target profit of $66,400.

(Round your answers to 2 decimal places.)

6. Calculate Pin Cushion's degree of operating leverage.

(Round your answer to 2 decimal places.)

Variable Costing

Variable Costing is cost concept managers use to treat costs differently from the normal way. Product costs only compose of variable costs thus all fixed costs are treated as operating/administrative expenses. The purpose for managers to apply this concept is to help determine which among the wide array products help contribute in paying off the fixed costs that are not easily traceable to each products.

Answer and Explanation:

1. In obtaining the weighted-average unit contribution margin, you first obtain the contribution per unit of each product then multiply these amounts by its corresponding sales mix percentage (based on units sold).

Product A Product B Total
Contribution Margin $26,200 $32,800
Divided by: Total Units Sold 1,100 2,140 3,240
Contribution Margin per Unit $23.82 $15.33
Multiply by: Sales Mix Percentage 1,100/3,240 or 33.95% 2,140/3,240 or 66.05%
Weighted Average Unit Contribution Margin $8.09 $10.12 $18.21

In conclusion, the weighted-average unit contribution margin is $18.21.

For the second question, the weighted average contribution margin ratio is simply obtained by getting the total contribution margin then divide it by total sales.

Weighted Average Contribution Margin Ratio = ($26,200+$32,800)/($44,000+$59,000) = 57.28%

2. For the break-even units, it can obtained by dividing the total fixed by the weighted average unit contribution margin solved from number 1.

Break-even Units = $40,000/$18.21 = 2,196.60 or 2,197 units

For the break-even sales, it can obtained by dividing the total fixed by the weighted average unit contribution margin ratio solved from number 1

Break-even Sales = $40,000/57.28% = $69,832.40

3. In order to get the breakdown of each product, we use the break-even units from number 2 and multiplying by the respective sales mix percentage.

Product A break-even units = 2,197*(1,100/3,240) = 745.90 or 746 units

Product B break-even units = 2,197*(2,140/3,240) = 1,451.1 or 1,451 units

4. In obtaining the target sales to earn a target profit, we should first obtain the target contribution margin by adding the target profit and fixed costs. After which, we divided the target contribution margin to the weighted average unit contribution margin ratio solved from number 1 to get the target sales.

Target Contribution Margin = $40,000 + $66,400 = $106,400

Target Sales = $106,400/57.28% = $185,754.19

5. For the breakdown of sales to each product, the same method from number 3 will be used but, instead of using break-even units, we will use the target sales and also multiplying the corresponding sales mix.

Product A sales = $185,754.19*(1,100/3,240) = $63,064.69

Product B sales = $185,754.19*(2,140/3,240) = $122,689.50

6. In obtaining the degree of operating leverage, we just basically get the total contribution margin and dividing it by the total net income.

Net Income = $26,200 + $32,800 - $40,000 = $19,000

Degree of Operating Leverage = ($26,200 + $32,800)/$19,000 = 3.11


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