Chapter 6
LO6
Exercise 1
Simple Life Tea, Inc. sells two different products: Green Tea and Black Tea. The
estimated contribution margin income statement of next month is as follows.
Simple Life Tea
Contribution Margin Income Statement
Based on Target Profit of $160,000
Sales
revenue
Variable
cost
Contribution
margin
Fixed cost
Profit
Green Tea
(10,000 units)
Per unit
Total
$30
$300,000
12
$18
Black Tea
(20,000 units)
Per unit
Total
$10
$200,000
Overall
Total
$500,000
6
120,000
$180,000
$4
120,000
$ 80,000
Percent
100%
240,000
48%
260,000
52%
124,000
$136,000
1.
Compute the weighted average unit contribution margin.
2.
Compute the break-even units of Green Tea and Black Tea based on the sales
mix.
3.
Compute the level of total sales that would be required to earn a target profit of
$396,000.
4.
If Simple Life, Inc. sells more than 10,000 units of Green Tea and less than
20,000 units of Black Tea, indicate the effects on weighted average unit
contribution margin and break-even sales?
Chapter 6
LO6
Exercise 1 Solutions
1.
Compute the weighted average unit contribution margin.
Unit mix of Green Tea = $300,000 ÷ 500,000 = 60%
Unit mix of Black Tea = $200,000 ÷ 500,000 = 40%
Weighted average unit contribution margin = (Unit contribution margin of Green
Tea × Unit mix (weight)) + (Unit contribution margin of Black Tea × Unit mix
(weight)) =
($18 × 60%) + ($4 × 40%) = $10.80 + $1.60 = $12.40
2. Compute the break-even units of Green Tea and Black Tea based on the sales
mix.
Break-even units = Fixed cost ÷ Weighted average unit contribution margin =
$124,000 ÷ $12.40 = 10,000 units
Green Tea break-even units = 10,000 × 60% of product mix = 6,000 units
Black Tea break-even units = 10,000 × 40% of product mix = 4,000 units
3. Compute the level of total sales that would be required to earn a target profit of
$396,000.
Weighted average contribution margin ratio =
$260,000 ÷ 500,000 = 52%
Target sales = (Fixed cost + Target profit) ÷ Weighted average contribution
margin ratio =
($124,000 + $396,000) ÷ 52% =
$520,000 ÷ 52% = $1,000,000
4. If Simple Life, Inc. sells more than 10,000 units of Green Tea and less than
20,000 units of Black Tea, indicate the effects on weighted average unit
contribution margin and break-even sales?
In this situation, the sales mix (weight) on Green Tea will increase and the sales
mix (weight) on Black Tea will decrease, resulting in an increase in the weighted
average unit contribution margin. Therefore, break-even sales will decrease for
the increase in the weighted average unit contribution margin.