Baby Food Industries

QUESTION 3

Baby Food Industries manufactures and sells a highly successful line of baby food in Asia. It
plans to expand the business to Europe and the company is considering to produce
biscuits, cereal, and fruit juice to prevent dry and chapped skin. Budgeted sales by product
for the coming month are shown below:
Product
Percentage of Sales
Sales (‘000)
Variable Expenses (‘000)
Contribution Margin (‘000)

Biscuit

Cereal

Fruit juice

Total

20

52

28

100

$150,000

$390,000

$210,000

$750,000

108,000

78,000

84,000

270,000

42,000

312,000

126,000

480,000

Fixed Expenses (‘000)

449,280

Net Income (‘000)

$30,720

As shown by these data, net operating income is budgeted at $30,720,000. Assume that
actual total sales for the month is $750,000,000 as planned. Actual sales by product are:
Biscuit, $300,000,000; Cereal, $180,000,000; and Fruit juice, $270,000,000.

Required:
a)

Prepare a contribution income statement for the month based on the actual sales.
Present the income statement as the format shown above.

b)

Compute the break-even point in sales dollars for the month based on your actual data.

c)

Considering the fact that the company met its $750,000 sales budget for the month, the
president is shocked at the result shown on your income statement in (i) above. Prepare
a brief memo for the president explaining why both the operating results and the break
even point in sales dollars are different from what was budgeted.