Bleeker Street Company produces and sells two lines of business suits, the Contemporary and the Traditionalist. The following monthly data are provided: Contemporary TraditionalistEstimated unit sales per month 500 1,000 Selling price$200 $175 Variable manufacturing costs 110 100 Variable selling and administrative costs 10 10 Budgeted net income is $45,000 per month. Required:1) Calculate the monthly break-even sales in units and dollars based on the budgeted sales mix.2) Calculate the firm's overall margin of safety in dollars.3) Compute the firm's profit assuming 1,500 units are sold in a 1:1 sales mix.4) Explain any difference between the firm's budgeted net income of $35,000 and your answer to Requirement 3.

Question

What will be an ideal response?

Answer 1

Answers will vary 

1) Total fixed costs = Total contribution margin ? Budgeted income = {(500 × $80) + (1,000 × $65)} ? $45,000 = $60,000.
Weighted average contribution margin = {(1 × $80) + (2 × $65)} ÷ 3 = $70
Break-even point = Total fixed costs ÷ Weighted average contribution margin = $60,000 ÷ $70 = 858 suits (rounded).
Contemporary = 858 × 1 ÷ 3 = 286 units; In dollars: 286 × $200 = $57,200
Traditionalist = 858 × 2/3 = 572 units; In dollars: 572 × $175 = $100,100 

2) Margin of safety = Budgeted sales ? Break-even sales = ((500 × $200) + (1,000 × $175)) ? ($57,200 + $100,100) = $275,000 ? $157,300 = $117,700

3) Total contribution margin ? Fixed costs = ((750 × $80) + (750 × $65)) ? $60,000 = $108,750 ? $60,000 = $48,750.

4) Net income would be higher by $3,750 ($48,750 ? $45,000) because 250 additional Contemporary units would add $20,000 (250 × $80) to earnings while 250 fewer Traditionalist units would decrease earnings by $16,250 (250 × $65), for a net increase of $3,750.