Question

Exercise 7-29 Retail; CVP Analysis with Multiple Products (LO 7-1, 7-2, 7-5) Tim’s Bicycle Shop sells 21-speed bicycles. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories, as follows: Product Type Sales Price Invoice Cost Sales Commission High-quality $ 2,000 $ 1,050 $ 110 Medium-quality 1,100 770 40 Three-quarters of the shop’s sales are medium-quality bikes. The shop’s annual fixed expenses are $239,400. (In the following requirements, ignore income taxes.) Required: Compute the unit contribution margin for each product type. What is the shop’s sales mix? Compute the weighted-average unit contribution margin, assuming a constant sales mix. What is the shop’s break-even sales volume in dollars? Assume a constant sales mix. How many bicycles of each type must be sold to earn a target net income of $128,250? Assume a constant sales mix.

Answer 1

Answer:

What is the shop’s sales mix?  

PRODUCT 1 High 25%  

PRODUCT 2 Medium 75%  

Compute the unit contribution margin for each product type.    

PRODUCT 1 High $ 0,840  

PRODUCT 2 Medium $ 0,290  

Compute the weighted-average unit contribution margin, assuming a constant sales mix  

PRODUCT 1 High 25%          weighted-average

                         $ 59,850 Contributing Margin

 

PRODUCT 2 Medium 75%          weighted-average

                                $ 179,550 Contributing Margin

What is the shop’s break-even sales volume in dollars?  

BREAK EVEN POINT  

TOTAL Income Statement

$ 742,000 Total Net Sales

How many bicycles of each type must be sold to earn a target net income of $128,250?  

PRODUCT 1 High      140  

PRODUCT 2 Medium  420  

                                   560  Bicycles

Explanation:

PRODUCT 1 High    

Quantity Unit TOTAL Income Statement

5  $ 2,000 $ 10,500 Total Net Sales

-$ 1,050 -$ 5,513 Variable Cost

-$ 0,110 -$ 0,578 Variable Cost

$ 0,840 $ 4,410 Contributing Margin

 -$ 59,850 Anual Fixed Costs

-528% -$ 55,440 Segment Margin

   

PRODUCT 2 Medium    

Quantity Unit TOTAL Income Statement

16  $ 1,100 $ 17,325 Total Net Sales

-$ 0,770 -$ 12,128 Variable Cost

-$ 0,040 -$ 0,630 Variable Cost

$ 0,290 $ 4,568 Contributing Margin

 -$ 179,550 Anual Fixed Costs

-1010% -$ 174,983 Segment Margin

   

TOTAL    

Quantity Unit TOTAL Income Statement

21  $ 1,325 $ 27,825 Total Net Sales

-$ 0,840 -$ 17,640 Variable Cost

-$ 0,058 -$ 1,208 Variable Cost

$ 0,428 $ 8,978 Contributing Margin

 -$ 239,400 Anual Fixed Costs

-828% -$ 230,423 Segment Margin

   

BREAK EVEN POINT    

Quantity Unit TOTAL Income Statement

560  $ 1,325 $ 742,000 Total Net Sales

-$ 0,840 -$ 470,400 Variable Cost

-$ 0,058 -$ 32,200 Variable Cost

$ 0,428 $ 239,400 Contributing Margin

 -$ 239,400 Anual Fixed Costs

0% $ 0,000 Segment Margin

   

BREAK EVEN POINT    

Quantity Unit TOTAL Income Statement

860  $ 1,325 $ 1.139,500 Total Net Sales

-$ 0,840 -$ 722,400 Variable Cost

-$ 0,058 -$ 49,450 Variable Cost

$ 0,428 $ 367,650 Contributing Margin

 -$ 239,400 Anual Fixed Costs

11% $ 128,250 Segment Margin