This is a practice problem for an upcoming midterm Please sh

This is a practice problem for an upcoming midterm. Please show all formulas and calculations so I can apply the concepts on my test.

Irish Fantasy, Inc., makes two products – Garden Gnomes and Laughing Gnomes. Revenue, cost, and sales data on the two products appear below:

Fixed expenses total $475,800 per year.

REQUIRED:

a. Compute the break-even point in dollars for the company as a whole.

b. Determine the break-even sales in units and in dollars for each product.

Solution

Answer a.

Garden Gnomes:

Selling Price per unit = $15
Variable Expenses per unit = $9

Contribution Margin per unit = Selling Price per unit - Variable Expenses per unit
Contribution Margin per unit = $15 - $9
Contribution Margin per unit = $6

Annual Sales in unit = 20,000

Laughing Gnomes:

Selling Price per unit = $100
Variable Expenses per unit = $20

Contribution Margin per unit = Selling Price per unit - Variable Expenses per unit
Contribution Margin per unit = $100 - $20
Contribution Margin per unit = $80

Annual Sales in unit = 5,000

Company:

Sales Mix = Annual Sales in unit of Garden Gnomes : Annual Sales in unit of Laughing Gnomes
Sales Mix = 20,000 : 5,000
Sales Mix = 4 : 1

Selling Price per unit = $15 * 4/5 + $100 * 1/5
Selling Price per unit = $32.00

Contribution Margin per unit = $6 * 4/5 + $80 * 1/5
Contribution Margin per unit = $20.80

Contribution Margin Ratio = Contribution Margin per unit / Selling Price per unit
Contribution Margin Ratio = $20.80 / $32.00
Contribution Margin Ratio = 0.65

Fixed Expenses = $475,800

Break-even Point in unit = Fixed Expenses / Contribution Margin per unit
Break-even Point in unit = $475,800 / $20.80
Break-even Point in unit = 22,875

Break-even Point in dollar = Fixed Expenses / Contribution Margin Ratio
Break-even Point in dollar = $475,800 / 0.65
Break-even Point in dollar = $732,000

Answer b.

Company:

Break-even Point in unit = 22,875

Garden Gnomes:

Break-even Point in unit = Break-even Point in unit (Company) * Sales Ratio
Break-even Point in unit = 22,875 * 4/5
Break-even Point in unit = 18,300

Break-even Point in dollar = Break-even Point in unit * Selling Price
Break-even Point in dollar = 18,300 * $15
Break-even Point in dollar = 274,500

Laughing Gnomes:

Break-even Point in unit = Break-even Point in unit (Company) * Sales Ratio
Break-even Point in unit = 22,875 * 1/5
Break-even Point in unit = 4,575

Break-even Point in dollar = Break-even Point in unit * Selling Price
Break-even Point in dollar = 4,575 * $100
Break-even Point in dollar = 457,500