Jakku Inc manufactures and sells two droid models R2s and BB

Jakku, Inc. manufactures and sells two droid models: R2s and BB8s and C1s. Historically, the sales mix is 40% R2s, 30% BB8s, and 20% C1s. R2s have a selling price of $1,200 per unit, BB8s are sold for $500 per unit and C1s are sold for $300 each. Variable costs are $600 for R2s, and $350 for BB8s and $100 for C1s. The company’s fixed costs are $500,000 per year. The company tax rate is 40%. Calculate as is, Disregard the other 10% sales mix percentage that\'s not included above.

Required:

a. Compute the volume of sales in units of each product needed to reach a net income of $750,000.

R2s

BB8s

C1s

BEP Units

b. Compute the volume of sales in units of each product needed to reach a net income of $750,000.

R2s

BB8s

C1s

Units

c. Calculate the margin of safety in total units assuming your answers in a. and b. are correct.

Units

Margin of Safety

d.         Calculate the operating leverage for the sales volume plan you computed in b.

Operating leverage: =

e. If the company wanted to lower the total number of units produced to reach the break-even point, which product should they increase production of, which should they decrease the production of? Briefly explain.

Solution

Answer for Part (a)

Let n be the number of units of C1 to be sold. Then, by the condition of sales=mix, the number of units of BB8 to be sold must be 1.5n and the number of units of R2 to be sold 2n [30% = 1.5 x 20% and 40% = 2 x 20%]

The gross sales value = (1200 x 2n) + (500 x 1.5n) + (300n) = 3450n ...... (1)

Total variable cost = (600 x 2n) + (350 x 1.5n) + (100n) = 1825n

Total Cost = Fixed cost + total variable cost = 500000 + 1825n ....... .......(2)

Gross income = Gross sales value - Total cost = (1) - (2) = 3450n - 1825n - 500000 = 1625n - 500000 ..... (3)

Since tax takes away 40% of gross income, the net income = 60%(i.e., 0.6) of gross income = (3) x 0.6 = 0.6(1625n - 500000) = 975n - 300000. ..... (4)

By the problem, net income must be 750000.

So, (4) = 750000 i.e., 975n - 300000 = 750000 or 975n = 1050000 or n = 1050000/975 = 1076.9 ~ 1077.

ANSWER:Number of units to be sold to get a net income of 750000 are 1077 of C1, 1615 of BB8 and

2154 of R2.