contribution margin 461081

Hewtex Electronics manufactures two products, tape recorders and electronic calculators, and sells them nationally to wholesalers and retailers. The Hewtex management is very pleased with the company’s performance for the current fiscal year. Projected sales through DecemA?¬ber 31, 2010, indicate that 70,000 tape recorders and 140,000 calculaA?¬tors will be sold this year. The projected earnings statement, which appears below, shows that Hewtex will exceed its earnings goal of 9% on sales after taxes.

The tape recorder business has been fairly stable for the last few years, and the company does not intend to change the tape recorder price. However, the competition among manufacturers of electronic calculators has been increasing. Hewtex’s calculators have been very popular with consumers. In order to sustain this interest in its calcuA?¬lators and to meet the price reductions expected from competitors, management has decided to reduce the wholesale price of its calculator from $22.50 to $20.00 per unit effective January 1, 2011. At the same time, the company plans to spend an additional $57,000 on advertising during the fiscal year 2011. As a consequence of these actions, manageA?¬ment estimates that 80% of its total dollar revenue will be derived from calculator sales as compared to 75% in 2010. As in prior years, the sales mix is assumed to be the same at all volume levels.

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The total fixed overhead costs will not change in 2011, nor will the variable overhead cost rates (applied on a direct labor hour base). However, the cost of materials and direct labor is expected to change. The cost of solid state electronic components will be cheaper in 2011. Hewtex estimates that material costs will drop 10% for the tape recordA?¬ers and 20% for the calculators in 2011. However, direct labor costs for both products will increase 10% in the coming year.

Hewtex Electronics

Projected Earnings Statement (totals in thousands)

For the Year Ended December 31, 2010

Tape Electronic

Recorders Calculators Total

Total Per Unit Total Per Unit

Sales $1,050 $15.00 $3,150 $22.50 $4,200.0

Production Costs:

Materials $ 280 $ 4.00 $ 630 $ 4.50 $ 910.0

Direct labor 140 2.00 420 3.00 560.0

Variable overhead 140 2.00 280 2.00 420.0

Fixed overhead 70 1.00 210 1.50 280.0

Total $ 630 $ 9.00 $1,540 $11.00 $2,170.0

Gross margin $ 420 $ 6.00 $1,610 $11.50 $2,030.0

Fixed Selling & Admin Exp. 1,040.0

Income before taxes $ 990.0

Income taxes (55%) 544.5

Net Income $ 445.5

Required:

1. Assuming the sales mix remains constant at all volume levels, how many units in total and of each product does Hewtex Electronics need to sell in 2010 to breakeven? Solve the problem using both (a) the dollar per unit contribution margin and (b) the contribution margin percentage.

2. Compute the new cost structure, unit mix, and revenue mix for 2011 based on the changes that apply for 2011.

3. Assuming the sales mix remains constant at all volume levels, how many units in total and of each product does Hewtex Electronics need to sell in 2011 to breakeven? Solve the problem using both (a) the dollar per unit contribution margin and (b) the contribution margin percentage.

4. What volume of sales, in dollars, is required in 2011 if Hewtex Electronics is to earn a profit after taxes equal to 9% of sales? Also indicate the dollar and unit sales required of each product.

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