Question

The Mugger sells three types of mugs, flowers, dogs, and sports. The following information is available:________.

Total Sales Volume Selling Price Variable cost per unit Total fixed costs Flowers 25,000 $20 10 Dogs 100,000 $25 20 Sports 50,000 $10 6 $500,000
REQUIRED (show all supporting calculations):________.
1. What is the breakeven point for The Mugger?
2. Would you recommend promoting the change in product mix to 4 to 2 to 1 of flower mugs, dog mugs, and sports mugs? Why?
3. An executive summary is required.

Answer 1

Flowers Dogs Sports Total

sales volume 25,000 100,000 50,000

selling price $20 $25 $10

variable cost $10 $20 $6

total fixed costs $500,000

contribution margin $10 $5 $4

weighted contribution margin = [(25,000 x $10) + (100,000 x $5) + (50,000 x $4)] / 175,000 = ($250,000 + $500,000 + $200,000) / 175,000 = $5.428571

break even point in units = $500,000 / $5.428571 = 92,105.26 ≈ 92,106 units

flowers: (25/175) x 92,106 = 13,158 units

dogs: (100/175) x 92,106 = 52,632 units

sports: (50/175) x 92,106 = 26,316 units

total = 92,106 units

break even point in $

flowers: 13,158 units x $20 = $263,160

dogs: 52,632 units x $25 = $1,315,800

sports: 26,316 units x $10 = $263,160

total = $1,842,120

currently total contribution margin is:

flowers: 25,000 units x $10 = $250,000

dogs: 100,000 units x $5 = $500,000

sports: 50,000 units x $4 = $200,000

total = $950,000

operating profit = $950,000 - $500,000 = $450,000

if the change is successful, then total contribution margin would be:

flowers: 100,000 units x $10 = $1,000,000

dogs: 50,000 units x $5 = $250,000

sports: 25,000 units x $4 = $100,000

total = $1,350,000

new operating profit = $1,350,000 - $500,000 = $850,000

So yes, I would recommend promoting the change in product mix to increase the sales of flower mugs in order to increase operating profit.