EXERCISE 6-17 (30 MINUTES)

3. Memo to the president:

Although the company met its sales budget of B750,000 for the month,

the mix of products changed substantially from that budgeted. This is

the reason the budgeted net operating income was not met, and the

reason the break-even sales were greater than budgeted. The com-

pany’s sales mix was planned at 20% White, 52% Fragrant, and 28%

Loonzain. The actual sales mix was 40% White, 24% Fragrant, and 36%

Loonzain.

As shown by these data, sales shifted away from Fragrant Rice, which

provides our greatest contribution per dollar of sales, and shifted toward

White Rice, which provides our least contribution per dollar of sales. Al-

though the company met its budgeted level of sales, these sales pro-

vided considerably less contribution margin than we had planned, with a

resulting decrease in net operating income. Notice from the attached

statements that the company’s overall CM ratio was only 52%, as com-

pared to a planned CM ratio of 64%. This also explains why the break-

even point was higher than planned. With less average contribution

margin per dollar of sales, a greater level of sales had to be achieved to

provide sufficient contribution margin to cover fixed costs.

Problem 6-22 (45 minutes)