Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 52

Extensions of the CVP Basic Model—Multiple Products and Taxes

Assume that Ocean King Products sells three varieties of canned seafood with the following prices and costs:

	?Selling Price per Case	?Variable Cost per Case	?Fixed Cost per Month
Variety 1	$ 3	$2	-
Variety 2	5	3	-
Variety 3	10	6	-
Entire firm	-	-	$46,200

The sales mix (in cases) is 40 percent Variety 1, 35 percent Variety 2, and 25 percent Variety 3.

Required

a. At what sales revenue per month does the company break even?

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b. Suppose the company is subject to a 35 percent tax rate on income. At what sales revenue per month will the company earn $40,950 after taxes assuming the same sales mix?

Step 1 of 9

a.

Calculate break-even point

Break-even point is the level of operations at which the sales revenue and total costs become equal. There is no profit or no loss at break-even point sales.

In case of company having two or more products, calculate the break-even point assuming the individual products as components of one overall product.

In order to determine the break-even sales (cases) for the overall product called E, calculate the unit selling price, unit variable cost and unit contribution margin for the overall product E.

Calculate the unit selling price of product E by multiplying the unit selling prices of the individual products with their respective sales mix ratio. Calculate the unit variable cost also in the same manner. Calculate the unit contribution margin by deducting the unit variable cost of E from the unit selling price of E.