Problem 18-5A Letter Co. produces and sells two products, T and O. It manufactur
ID: 2349387 • Letter: P
Question
Problem 18-5A Letter Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow. Product T Product O Sales 800,000 800,000 Variable Costs 560,000 100,000 Contribution margin 240,000 700,000 Fixed Costs 100,000 560,000 Income before taxes 140,000 140,000 Income taxes (32% rate) 44,800 44,800 Net Income 95,200 95,200 Instructions: 1. Compute the break-even point in dollar sales for each product 2. Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings. 3. Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit sales price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32%income taxrate). 4. If sales greatly decrease, which product would experience a greater loss? Explain 5. Describe some factors that might have created the different cost structures for these two productsExplanation / Answer
1. BEP(units)= Fixed cost/ contribution per unit 20833.33 40000 BEP Sales=BEP units * Sale price 333333.3 640000 Product T Product O 2. Sales 528000 528000 Variable cost 369600 66000 Contribution 158400 462000 Units 50000 50000 Contribution per unit 3.168 9.24 Fixed cost 100000 560000 Net Income 58400 -98000 Tax 18688 -31360 Net Income after tax 39712 -66640 Product T Product O 3. Sales 1024000 1024000 Variable cost 716800 128000 Contribution 307200 896000 Units 50000 50000 Contribution per unit 6.144 17.92 Fixed cost 100000 560000 Net Income 207200 336000 Tax 66304 107520 Net Income after tax 140896 228480 4. If sale are decreased greatly Product O will suffer great loss because of high fixed cost and low variable cost.It has also high BEP due to same reason 5. Factors that may result different cost structure (i) Heavy Machine cost(rental or fixed depreciation) for product O. (ii).High raw material or labour cost for product T