Question

The motorcycle helmets are priced at $220 and have variable costs of $140 each. Total fixed cost for Head-First as a whole equals $58,900 (includes all fixed factory overhead and fixed selling and administrative expense). Next year, Head-First expects to sell 5,000 bicycle helmets and 2,000 motorcycle helmets. Required: 1. Form a package of bicycle and motorcycle helmets based on the sales mix expected for the coming year. 2. Calculate the break-even point in units for bicycle helmets and for motorcycle helmets. 3. Check your answer by preparing a contribution margin income statement.

Answer 1

Answer:

1.

Sales Ratio  

Bicycle Helmet = 5000 / 7000 = 71.4%  

Motorcycle Helmet = 2000 / 7000 = 28.6%  

Package  

Price = ( $75 x 71.4% ) + ( $220 x 28.6% ) = $116.47  

Variable cost = ( $45 x 71.4% ) + ( $140 x 28.6% ) = $72.17  

Contribution Margin = $116.47 - $72.17 =  $44.30

2.

Breakeven point is the level of sales on which business has no profit no loss situation.  

Break-even point = Fixed cost / Contribution margin = $58,900 / $44.30 = 1,329.57 units

3.

At Break-even sales operating Income should be zero  

As below  

Contribution margin income statement

Sales ( $116.47 x 1329.57 )                                  $154,855  

Total variable expense ($72.17 x 1,329.57 )      $(95,955)  

Total contribution margin ( $44.3 x 1329.57)    $58,900  

Total fixed expense                                            $(58,900)  

Operating income                                               $0