Warm Hands, a small company ba

Warm Hands, a small company based in Prince Edward Island,manufactures and sells two types of lightweight gloves forrunners—Warm and Cozy. Current revenue, cost, and unit sales datafor the two products appear below:

Warm Cozy
  Selling price per pair $ 6.00 $ 9.00
  Variable expenses per pair $ 1.50 $ 4.50
  Number of pairs sold monthly 3,000 units 1,000 units

Fixed expenses are $2,880 per month.


1. Assuming the sales mix above, do thefollowing:

a. Prepare a contribution formatincome statement showing both dollars and percentage columns foreach product and for the company as a whole. (Roundpercentage answers to 2 decimal places.)

b. Compute the break-even point indollars for the company as a whole and the margin of safety in bothdollars and percentage of sales. (Do not round yourintermediate calculations. Roundpercentage answer to 2 decimalplaces.)

c. Compute the break-even point inunits for the company as a whole and the margin of safety in bothunits (pairs of gloves) and percentage of sales. (Roundpercentage answer to 2 decimal places.)

d. Compute how many pairs of glovesmust be sold overall if the company wants to make an after-taxtarget profit of $6,300 and the tax rate is 30%. Assume that thesales mix remains the same as shown above.

2. The company has developed another type ofgloves that provide better protection in extreme cold, Toasty,which the company plans to sell for $17.00 per pair. At this price,the company expects to sell 1,000 pairs per month of the product.The variable expense would be $13.60 per pair. The company’s fixedexpenses would not change.

a. Prepare another contribution formatincome statement, including sales of Toasty (sales of the other twoproducts would not change). (Round percentage answers to 2decimal places.)

b. Compute the company’s newbreak-even point in dollars for the company as a whole and the newmargin of safety in both dollars and percentage of sales.(Round your break-even sales to the nearest whole dollaramount and percentage answer to 2 decimal places.)


Contribution format IncomeStatement
Warm Cozy Total
Amount % Amount % Amount %
Sales 18000 100.00% 9000 100.00% 27000 100%
Less:Variable Expenses 4500 25.00% 4500 50.00% 9000 33.33%
Contribution Margin 13500 75.00% 4500 50.00% 18000 66.67%
Less:Fixed Expenses 2880
Net Operating Income 15120
Break even point in dollar sales = Fixed costs/Contributionmargin ratio


2880/66.67% =4320

Break even point in unit sales = Fixed costs/Weighted averagecontribution margin (Working note)

=2880/4.5 = 640

Margin of safety = Sales – Break even Sales [27000 – 4320] 22680
in % = Margin of Safety in Dollars/Sales (22680/27000) x100 84.00%
d.Sales in Units = (Desired Income before tax + fixedcosts)/Contribution Margin per unit
=(6300/0.7 + 2880)/6
Contribution format IncomeStatement
Warm Cozy Toasty Total
Amount % Amount % Amount % Amount
Sales 18000 100.00% 9000 100.00% 17000 100.00% 44000
Less:Variable Expenses 4500 25.00% 4500 50.00% 13600 80.00% 22600
Contribution Margin 13500 75.00% 4500 50.00% 3400 20.00% 21400
Less:Fixed Expenses 2880
Net Operating Income 18520

Break even point in dollar sales = fixed cost/contributionmargin ratio

=2880/20 = 14400


Margin of safety= sales – Break even Sales

=17000 – 14400

in % 15.29%

Working note:

Warm Cozy Total
% %
Sales $6 100% $9 100%
Variable expenses $1.5 25% $4.5 50%
Contribution margin – A $4.5 75% $4.5 50%
Sales units 3000 1000
Selling price per units $6 $9
Total sales $18000 $9000 $27000
Sales mix – B 66.67% 33.33% 100%
Weighted average contribution – (A x B) $3 $1.5 $4.5

Please rate, thanks.

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