Answered Essay: Suppose that Chillmax Company now sells both pairs of shoes and fabric carryalls. The pairs of shoes are priced at $60 and h

OBJECTIVEBrief Exerciso 7-30 Break-Even Point in Units for a Multiple-Product Firm Example 7.7 Suppose that Chillmax Company now sells both pairs of shoes and fabric carryalls. The pairs of shoes are priced at $60 and have variable costs of $21 each. The carryalls are priced at $36 and have variable costs of $9 cach. Total fixed cost for Chillmax as a whole equals $91,500 (includes all fixed factory overhead and fixed selling and administrative expense). Next year, Chillmax expects to sell 3,500 pairs of shoes and 875 carryalls. Required: 1. Form a package of shoes and carryalls based on the sales mix expected for the coming year 2. Calculate the break-even point in units for pairs of shoes and for carryalls. 3. Check your answer by preparing a contribution margin income statement.

Suppose that Chillmax Company now sells both pairs of shoes and fabric carryalls. The pairs of shoes are priced at $60 and have variable costs of $21 each. The carryalls are priced at $36 and have variable costs of $9 each. Total fixed cost for Chillmax as a whole equals $91,500 (includes all fixed factory overhead and fixed selling and administrative expense). Next year, Chillmax expects to sell 3,500 pairs of shoes and 875 carryalls. Required: Form a package of shoes and carryalls based on the sales mix expected for the coming year. Calculate the break-even point in units for pairs of shoes and for carryalls. Check your answer by preparing a contribution margin income statement.

Expert Answer

 

1. Sale Mix for Shoes and carryalls is 3,500: 875 which is then reduced to the smalles possible whole number which is

4:1 as calculated below:

3500 875
700 175 divided by 5
140 35 divided by 5
28 7 divided by 5
4 1 divided by 7

Now package of shoes and carryalls based on sale mix is

Product Price Variable Cost Unit Contribution Margin Sales Mix Package Contribution Margin
a b c=a-b d e= c*d
Shoes 60 21 39 4 156
Carryalls 36 9 27 1 27
Package total 183

2. Break even unit in pairs for shoes and carryalls will be total fixed costs divided by package contribution margin

Total Fixed Costs 91,500
Package Contribution Margin 183
Break even packages 500
Break even pair for Shoes (500*4) 2,000 pairs
Break even pair for Carryalls (500*1) 500 pairs
2,500 pairs

3. Contribution Margin Income statement based on break even units is as prepared below:

Income Statement
Shoes Carryalls Total
Sales 120000 18000 138000
2,000*60 500*36
Less: Variable Costs 42000 4500 46500
2,000*21 500*9
Contribution Margin 91500
Less: Fixed Costs 91,500
Net Profit 0
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