Henna Company produces and sells two products, Carvings and Mementos. 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. Income statements for each product follow. Carvings Mementos
Sales $ 2,000,000 $ 2,000,000
Variable costs 1,600,000 250,000
Contribution margin 400,000 1,750,000
Fixed costs 125,000 1,475,000
Income $ 275,000 $ 275,000
Required:
1. Compute the break-even point in dollar sales for each product. (Round the answer to whole dollars.)
2. Assume that the company expects sales of each product to decline to 30,000 units next year with no change in unit selling 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 benefit.
3. Assume that the company expects sales of each product to increase to 60,000 units next year with no change in unit selling price. Prepare a contribution margin income statement for the next year (as shown above with columns for each of the two products).
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 products.