Faculty of Engineering Management

Managerial Accounting
Class II, Exercise 3

Student name: Yehya Soliman

Student ID: 134628
Exercise 3
Paddleboard Incorporated builds three products: River, Lake, and Ocean. Information for these three
products is shown below:

River Lake Ocean Total

Selling price per unit $300 $250 $275
Variable cost per unit $175 $150 $125
Expected unit sales (annual) 14,000 2,000 4,000 20,000
Sales mix 70% 10% 20% 100%

Total annual fixed costs are $765,000. Assume the sales mix remains the same at all levels of sales.

How many products in total must be sold to break even?

How many units of each product must be sold to break even?
How many products in total must be sold to earn an annual profit of $1,275,000?
How many units of each product must be sold to earn an annual profit of $1,275,000?
Assume each scenario below is independent of the other. Unless stated otherwise, assume the
variables are the same as in the base case.

(1) Prepare a contribution margin income statement for the base case.
(2) How will total profit change if the Lake sales price increases by 15 percent? (Compare your
result with requirement 1 above.)
(3) Go back to the base case. How will total profit change if the River sales volume decreases by
2,000 units and the sales volume of other products remains the same? (Compare your result
with requirement 1 above.)
(4) Go back to the base case. How will total profit change if fixed costs decrease by 10 percent?
(Compare your result with requirement 1 above.)
Answer:
i. Total sales for BEP

Fixed costs
BEP =
Weighted average contribution margin

765,000
= = 6,000
(300 175) 0.7 + (250 150) 0.1 + (275 125) 0.2

ii. Each product sales for BEP

= 6,000 0.7 = 4,200

= 6,000 0.1 = 600
= 6,000 0.2 = 1,200

iii. Totals sales for profit of $1,275,000

+
=

765,000 + 1,275,000
= = 16000
(300 175) 0.7 + (250 150) 0.1 + (275 125) 0.2

iv. Each product sales for profit of $1,275,000

= 16,000 0.7 = 11,200

= 16,000 0.1 = 1,600
= 16,000 0.2 = 3,200
 Income = Revenues Variable costs Fixed costs
(1). Base case Income

River Lake Ocean Total

Selling 4,200,000 500,000 1,100,000 5,800,000
variable costs 2,450,000 300,000 500,000 3,250,000
Contribution Margin 1,750,000 200,000 600,000 2,550,000
Fixed Costs 765,000
Base case Income 1,785,000

(2). 15% lake sales increased Income

River Lake (+15%) Ocean Total

Selling 4,200,000 575,000 1,100,000 5,875,000
variable costs 2,450,000 345,000 500,000 3,295,000
Contribution Margin 1,750,000 230,000 600,000 2,580,000
Fixed Costs 765,000
15% lake sales increased Income 1,815,000
Base case Income 1,785,000

(3). 2000 units River sales decreased Income

River (2000 unit decreased) Lake Ocean Total

Selling 3,600,000 500,000 1,100,000 5,200,000
variable costs 2,100,000 300,000 500,000 2,900,000
Contribution Margin 1,500,000 200,000 600,000 2,300,000
Fixed Costs 765,000
2000 units River sales decreased Income 1,535,000
Base case Income 1,785,000

(4). Fixed costs reduced by 10%

River Lake Ocean Total

Selling 4,200,000 500,000 1,100,000 5,800,000
variable costs 2,450,000 300,000 500,000 3,250,000
Contribution Margin 1,750,000 200,000 600,000 2,550,000
Fixed Costs (-10% ) 688,500
Income 1,861,500
Base case Income 1,785,000