Marlboro Company makes three products, Alpha, Beta, Gamma. Below are the income
ID: 2378434 • Letter: M
Question
Marlboro Company makes three products, Alpha, Beta, Gamma.
Below are the income statements for two recent months:
Fixed Costs are: $56,000
May June
Sales $160,000 $120,000
Costs 120,000 104,000
Net Income 40,000 16,000
Selling price and cost data by product are as follows.
Alpha Beta Gamma
Selling Price $40 $20 $10
Variable Costs 16 6 6
Contribution Margin 24 14 4
Sales mix (in dollars) 40% 40% 20%
1.) Determine the break-even point in dollars
2.) Which product is the most profitable per unit sold?
3.) Which product is most profitable per dollar of sales?
4.) What sales dollars are needed to earn $70,000 per month, and how many units of each product will be sold at that sales level if the usual mix is maintained?
5.) The sales manager belives that he could increase sales of Gamma by 10,000 units per month if more attention were devoted to is and less to Beta. Sales of Beta would fall by 2,000 units per month. What change in income would occur if this action were taken?
6.) July sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. What was the income?
7.) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least profitable product, management believes it should be dropped from the mix. If Gamma is dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise. By how much would sales of Alpha have to rise to maintain the same total income?
Explanation / Answer
1) Weighted average Contribution Margin = 24*40% + 14*40% + 4*20% = 16
Weighted average selling price = 40*40% + 20*40% + 10*20% =26
break-even point in dollars =selling price* Fixed price/Contribution Margin = 26*56000/16 =$91,000
2) Contribution margin (Profit per unit ) is highest for Alpha($24) and Alpha is the most profitable per unit sold
3) Contribution margin ratio for Alpha = 24/40 =0.6
Contribution margin ratio for Beta = 14/20 =0.7
Contribution margin ratio for Gamma = 4/10= 0.4
Contribution margin ratio is highest for beta
Beta is most profitable per dollar of sales
4) Let the sales be S
Sales*Contribution margin ratio - Fixed Cost = Profit
S*40%*0.6 + S*40%*0.7 + S*20%*0.4 -56,000 = 70000
S= $210,000
5) 5.) The sales manager belives that he could increase sales of Gamma by 10,000 units per month if more attention were devoted to is and less to Beta. Sales of Beta would fall by 2,000 units per month. What change in income would occur if this action were taken?
For a profit of $70000, sales dollar required = $210,000
Number of unts sold for Alpha = 40%*210000/40 = 2100 units
Number of unts sold for Beta = 40%*210000/20 = 4200 units
Number of unts sold for Gamma = 20%*210000/10 = 4200 units
After Manager's decision, new number of units sold
Units Alpha = 2100 units
Unit Beta = 2100-2000 = 100 units
Units Gamma = 4200+10000=14200 units
New income = 2100*24 + 100*14 + 14200*4 -56000= $52600
Income will decrease by 70000-52600 =$17400
6.) July sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. Income?
Income= 200,000*40%*0.6 + 200,000*30%*0.7 + 200,000*30%*0.4 -56,000 =$58000
7.) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least profitable product, management believes it should be dropped from the mix. If Gamma is dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise. By how much would sales of Alpha have to rise to maintain the same total income?
Current Profit = 600000*40%*0.6 + 600,000*40%*0.7 + 600,000*20%*0.4 -56,000 =$304,000
Current sales of beta in unit = 600,000*40%/20 = 12,000 units
Current sales of alpha in units = 600,000*40%/40 = 6000 units
Let the unit sales of alpha required to maintain profit = U
12000*14+ U*24 -56000=304,000
U= 8000 units
Change in Alpha's units = 8000-6000= 2000 units
Alpha would have to rise by 2000 units to maintain the same total income