Lifefit Products sells running shoes and shorts. The following is selected per-unit information for these two products:
Shoes Shorts
|
Sales price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
|
$50
|
|
$5
|
|
Variable costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
|
35
|
|
1
|
|
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
|
$15
|
|
$4
|
Fixed costs and expenses amount to $378,000 per month.
Lifefit has total sales of $1 million per month, of which 80 percent result from the sale of run- ning shoes and the other 20 percent from the sale of shorts.
Instructions
a. Compute separately the contribution margin ratio for each line of products.
b. Assuming the current sales mix, compute:
1. Average contribution margin ratio of total monthly sales.
2. Monthly operating income.
3. The monthly break-even sales volume (stated in dollars).
c. Assume that through aggressive marketing Lifefit is able to shift its sales mix toward more sales of shorts. Total sales remain $1 million per month, but now 30 percent of this revenue stems from sales of shorts. Using this new sales mix, compute:
1. Average contribution margin ratio of total monthly sales.
2. Monthly operating income.
3. The monthly break-even sales volume (stated in dollars).
d. Explain why the company's financial picture changes so significantly with the new sales mix.