Question

Tops Company sells Products D and E and has made the following estimates for the coming year:

Product

Unit Selling Price

Unit Variable Cost

Sales Mix

D

$30

$24

60%

E

70

56

40

Fixed costs are estimated at $202,400. Determine (a) the estimated sales in units of the overall product necessary to reach the break-even point for the coming year, (b) the estimated number of units of each product necessary to be sold to reach the break-even point for the coming year, and (c) the estimated sales in units of the overall product necessary to realize an operating income of $119,600 for the coming year.

Answer 1

(a) 22,000

(b) D = 13,200; E = 8,800

(c) 35,000

Step-by-step explanation:

(a) The average marginal contribution per unit is:

`C_(avg) = (P_D-V_D)*M_D +(P_E-V_E)*M_E\\C_(avg)= (30-24)*0.6+(70-56)*0.4\\C_(avg)=\$9.2/unit`

In order to break-even, total contribution must equal fixed costs:

`9.2*n=\$202,400\\n=22,000\ units`

(b) Multiply the total number of units by each product's sales mix to find the number of units of each product:

`n_D=0.6*22,000 =13,200\\n_E=0.4*22,000 = 8,800`

(c) The number of units required to realize an operating income of $119,600 is:

`n*9.2=\$202,400+\$119,600\\n=35,000`