Question

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 55,000 units of each product. Sales and costs for each product follow.

Product T Product O
Sales $907,500 $907,500
Variable costs 726,000 90,750
__ __
Contribution margin 181,500 816,750
Fixed costs 36,500 671,750
_ _
Income before taxes 145,000 145,000
Income taxes (30% rate) 43,500 43,500
__ __
Net income $101,500 $101,500
Compute the contribution margin ratio and the break-even point in dollar sales for each product. (Enter contribution margin ratio as a percentage rounded to 2 decimals.

Answer 1

a. Product T contribution margin ratio is 20.00%; and Product O contribution margin ratio is 90.00%.

b. Product T break-even point in dollar sales is $182,500.00; and Product O break-even point in dollar sales is $746,388.89.

Step-by-step explanation:

a. Computation of contribution margin ratio

This can be computed using the following formula:

Contribution margin ratio = (Contribution margin / Sales) * 100 ................. (1)

Using equation (1), we therefore, we have:

Product T contribution margin ratio = ($181,500 / $907,500) * 100 = 20.00%

Product O contribution margin ratio = ($816,750 / $907,500) * 100 = 90.00%

b. Computation of the break-even point in dollar sales

This can be computed using the following formula:

Break-even point in dollar sales = Fixed cost / Contribution margin ratio ............ (2)

Using equation (2), we therefore, we have:

Product T break-even point in dollar sales = $36,500 / 20.00% = $182,500.00

Product O break-even point in dollar sales = $671,750 / 90.00% = $746,388.89