Ironjay, Inc., produces two types of weight-training equipment: the Jay-flex (a weight machine that allows the user to perform a number of different exercises) and a set of free weights. Ironjay sells the Jay-flex to sporting goods stores for $200. The free weights sell for $75 per set. The projected income statement for the coming year follows:
Sales ………… $600,000
Less: Variable expenses …. 390,000
Contribution margin ….. $210,000
Less: Fixed expenses ….. 157,500
Operating income ….. $ 52,500
The owner of Ironjay estimates that 40 percent of the sales revenues will be produced by sales of the Jay-flex, with the remaining 60 percent by free weights. The Jay-flex is also responsible for 40 percent of the variable expenses. Of the fixed expenses, one-third are common to both products, and one-half are directly traceable to the Jay-flex line.
1. Compute the sales revenue that must be earned for Ironjay to break even.
2. Compute the number of Jay-flex machines and free weight sets that must be sold for Ironjay to break even.
3. Compute the degree of operating leverage for Ironjay. Now, assume that the actual revenues will be 40 percent higher than the projected revenues. By what percentage will profits increase with this change in sales volume?
4. Ironjay is considering adding a new product—the Jay-rider. The Jay-rider is a cross between a rowing machine and a stationary bicycle. For the first year, Ironjay estimates that the Jayrider will cannibalize 600 units of sales from the Jay-flex. Sales of free weight sets will remain unchanged. The Jay-rider will sell for $180 and have variable costs of $140. The increase in fixed costs to support manufacture of this product is $5,700. Compute the number of Jay-flex machines, free weight sets, and Jay-riders that must be sold for Ironjay to break even. For the coming year, is the addition of the Jay-rider a good idea? Why or why not? Why might Ironjay choose to add the Jay-rider anyway?