9.3 Multi-Product Calculations Flashcards
(26 cards)
Due to a change in market conditions, a company finds that it can sell as many of each of its three main products as it can produce. Which one of the following is most important in determining which of the three products to produce and market?
A. Sales prices per unit.
B. Contribution margin per hour of production time available.
C. Sales price less full absorption cost per hour of production time available.
D. Contribution margin per unit.
B. Contribution margin per hour of production time available.
In the short run, many costs are fixed. Therefore, contribution margin (revenues – all variable costs) becomes the best measure of profitability. Moreover, certain resources also are fixed. Accordingly, when deciding which products to produce at full capacity, the criterion should be the contribution margin per unit of the most constrained resource. This approach maximizes total contribution margin.
A manufacturer plans to produce two products, Product C and Product F, during the next year, with the following characteristics.
Product C Product F
Selling price per unit $10 $15
Variable cost per unit $ 8 $10
Expected sales (units) 20,000 5,000
Total projected fixed costs for the company are $30,000. Assume that the product mix would be the same at the breakeven point as at the expected level of sales of both products. What is the projected number of units (rounded) of Product C to be sold at the breakeven point?
A. 11,538
B. 2,308
C. 9,231
D. 15,000
C. 9,231
The composite unit contribution margin (composite UCM) is the combined UCM of the individual products.
Composite UCM = {($10 – $8) × [20,000 ÷ (20,000 + 5,000)]} +
{($15 – $10) × [5,000 ÷ (20,000 + 5,000)]}
= ($2 × 80%) + ($5 × 20%)
= $1.60 + $1.00
= $2.60
The total breakeven point is then calculated.
Total BEP in units = Fixed costs ÷ Composite UCM
= $30,000 ÷ $2.60
= 11,538.46
The breakeven point for a single product is its proportion of the total.
BEP for Product C = 11,538.46 × 80%
= 9,230.77
A company produces three distinct products as follows:
Product Percentage of Total Sales in Units Sale Price
Quinoa bars 50% $1
Millet cookies 30% $1
Amaranth pops 20% $2
The contribution margin for the Quinoa Bars is 25% of sales. Millet Cookies and Amaranth Pops both have a 50% contribution margin. Calculate the breakeven point in sales dollars if fixed costs are $675,000.
A. $1,705,263
B. $1,800,000
C. $506,757
D. $675,000
A. $1,705,263
Weighted-average UCM is 0.475 {[($1 × .25%) × 50%] + [($1 × 50%) × 30%] + [($2 × 50%) × 20%]}. Weighted-average selling price is $1.20 [(50% × $1) + (30% × $1) + (20% × $2)]. Thus, weighted-average CMR is 0.3958333 (.475 ÷ $1.20). The breakeven point in sales dollars is $1,705,263 ($675,000 ÷ 0.3958333).
Siberian Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 pairs and 13,000 pairs (units) of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models. The information below was compiled by the accounting department.
Selling price per unit
Mountaineering: $88.00
Touring: $80.00
Variable costs per unit
Mountaineering: 52.80
Touring: 52.80
Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate.
If Siberian Ski Company desires an after-tax net income of $24,000, how many pairs of touring model skis will the company have to sell?
A. 13,118 pairs.
B. 12,529 pairs.
C. 13,853 pairs.
D. 4,460 pairs.
A. 13,118 pairs.
The breakeven sales volume equals total fixed costs divided by the unit contribution margin (UCM). In the breakeven formula, the desired profit should be treated as a fixed cost. Because the UCM is stated in pretax dollars, the targeted profit must be adjusted for taxes. Thus, the targeted after-tax net income of $24,000 is equivalent to a pretax profit of $40,000 [$24,000 ÷ (1.0 – 0.40 tax rate)]. The sum of the pretax profit and the fixed costs is $356,800 ($316,800 + $40,000). Consequently, the desired sales volume is 13,118 pairs of touring skis [$356,800 ÷ ($80 selling price – $52.80 unit variable cost)].
Siberian Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 pairs and 13,000 pairs (units) of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models. The information below was compiled by the accounting department.
Selling price per unit
Mountaineering: $88.00
Touring: $80.00
Variable costs per unit
Mountaineering: 52.80
Touring: 52.80
Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate.
If the Siberian Ski Company Sales Department could guarantee the annual sale of 12,000 pairs of either model, Siberian Ski would
A. Produce 12,000 pairs of touring skis because they have a lower fixed cost.
B. Be indifferent as to which model is sold because each model has the same variable cost per unit.
C. Produce 12,000 pairs of mountaineering skis because they have a lower breakeven point.
D. Produce 12,000 pairs of mountaineering skis because they are more profitable.
D. Produce 12,000 pairs of mountaineering skis because they are more profitable.
Preparing income statements determines which model will produce the greater profit at a sales level of 12,000 pairs. Thus, as indicated below, the mountaineering skis should be produced.
Mountain / Touring
Sales $1,056,000 / $960,000
Variable costs (633,600) / (633,600)
Fixed costs (369,600) / (316,800)
Operating Income $ 52,800 / $ 9,600
Siberian Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 pairs and 13,000 pairs (units) of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models. The information below was compiled by the accounting department.
Selling price per unit
Mountaineering: $88.00
Touring: $80.00
Variable costs per unit
Mountaineering: 52.80
Touring: 52.80
Fixed costs will total $369,600 if the mountaineering model is produced but will be only $316,800 if the touring model is produced. Siberian Ski is subject to a 40% income tax rate.
The total sales revenue at which Siberian Ski Company would make the same profit or loss regardless of the ski model it decided to produce is
A. $880,000
B. $422,400
C. $924,000
D. $686,400
A. $880,000
The sales revenue at which the same profit or loss will be made equals the unit price times the units sold for each kind of skis. Accordingly, if M is the number of units sold of mountaineering skis and T is the number of units sold of touring skis, this level of sales revenue may be stated as $88M or $80T, and M is therefore equal to ($80 ÷ $88)T. Moreover, given the same profit or loss, the difference between sales revenue and total costs (variable + fixed) will also be the same for the two kinds of skis. Solving the equation below by substituting for M yields sales revenue of $880,000 [(11,000 × $80) or (10,000 × $88)].
SalesM – VCM – FCM = SalesT – VCT – FCT
$88M – $52.80M – $369,600 = $80T – $52.80T – $316,800
$35.2M – $52,800 = $27.2T
$35.2($80 ÷ $88)T = $27.2T + $52,800
T = 11,000 units
M = 10,000 units
MultiFrame Company has revenue and cost budgets for the two products it sells as shown to the right.
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit.
Plastic Frames / Glass Frames
Sales price $10.00 / $15.00
Direct materials (2.00) / (3.00)
Direct labor (3.00) / (5.00)
Fixed overhead (3.00) / (4.00)
Net income per unit $ 2.00 / $ 3.00
Budgeted unit sales 100,000 / 300,000
The total number of units MultiFrame needs to produce and sell to break even is
A. 150,000 units.
B. 354,545 units.
C. 177,273 units.
D. 300,000 units.
A. 150,000 units.
The calculation of the breakeven point is to divide the fixed costs by the contribution margin per unit. This determination is more complicated for a multi-product firm. If the same proportional product mix is maintained, one unit of plastic frames is sold for every three units of glass frames. Accordingly, a composite unit consists of four frames: one plastic and three glass. For plastic frames, the unit contribution margin is $5 ($10 – $2 – $3). For glass frames, the unit contribution margin is $7 ($15 – $3 – $5). Thus, the composite unit contribution margin is $26 ($5 + $7 + $7 + $7), and the breakeven point is 37,500 packages ($975,000 FC ÷ $26). Because each composite unit contains four frames, the total units sold equal 150,000.
MultiFrame Company has revenue and cost budgets for the two products it sells as shown to the right.
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit.
Plastic Frames / Glass Frames
Sales price $10.00 / $15.00
Direct materials (2.00) / (3.00)
Direct labor (3.00) / (5.00)
Fixed overhead (3.00) / (4.00)
Net income per unit $ 2.00 / $ 3.00
Budgeted unit sales 100,000 / 300,000
The total number of units needed to break even if the budgeted direct labor costs were $2 for plastic frames instead of $3 is
A. 154,028 units.
B. 144,444 units.
C. 156,000 units.
D. 146,177 units.
B. 144,444 units.
If the labor costs for the plastic frames are reduced by $1, the composite unit contribution margin will be $27 {($10 – $2 – $2) + [($15 – $3 – $5) × 3]}. Hence, the new breakeven point is 144,444 units [4 units × ($975,000 FC ÷ $27)].
MultiFrame Company has revenue and cost budgets for the two products it sells as shown to the right.
The budgeted unit sales equal the current unit demand, and total fixed overhead for the year is budgeted at $975,000. Assume that the company plans to maintain the same proportional mix. In numerical calculations, MultiFrame rounds to the nearest cent and unit.
Plastic Frames / Glass Frames
Sales price $10.00 / $15.00
Direct materials (2.00) / (3.00)
Direct labor (3.00) / (5.00)
Fixed overhead (3.00) / (4.00)
Net income per unit $ 2.00 / $ 3.00
Budgeted unit sales 100,000 / 300,000
The total number of units needed to break even if sales were budgeted at 150,000 units of plastic frames and 300,000 units of glass frames with all other costs remaining constant is
A. 171,958 units.
B. 418,455 units.
C. 153,947 units.
D. 365,168 units.
C. 153,947 units.
The unit contribution margins for plastic frames and glass frames are $5 ($10 – $2 – $3) and $7 ($15 – $3 – $5), respectively. If the number of plastic frames sold is 50% of the number of glass frames sold, a composite unit will contain one plastic frame and two glass frames. Thus, the composite unit contribution margin will be $19 ($5 + $7 + $7), and the breakeven point in units will be 153,947 [3 units × ($975,000 ÷ $19)].
A firm produces and sells two main products, with contribution margins per unit as follows.
- Product A: $10.00 per unit
- Product B: $8.00 per unit
Fixed costs for the year are budgeted at $264,480, and the firm calculated its breakeven point at 28,500 units. What percentage of units sold are expected to be Product A?
A. 64%
B. 56%
C. 44%
D. 36%
A. 64%
The first step is to find the average contribution margin of one unit, $9.28 ($264,480 ÷ 28,500). Then, set the average contribution margin equal to the proportion, X, of Product A, multiplied by Product A’s contribution margin plus the proportion, Y, of Product B, multiplied by Product B’s contribution margin ($9.28 = $10X + $8Y). As X and Y are proportions of 1, either is equal to 1 less the other (Y = 1 – X). Therefore, it is possible to solve for the proportion X algebraically by substituting the Y value in the earlier equation with the later equation, as follows:
$9.28 = $10X + $8Y; Y = 1 – X
$9.28 = $10X + $8 (1 – X)
$9.28 = $10X + $8 – $8X
$1.28 = $2X
X = .64
Thus, 64% of the contribution margin is contributed by Product A.
An enterprise sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period?
A. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.
B. An increase in the overall market for septine.
C. An increase in anticipated sales of petrol relative to sales of septine and tridol.
D. A decrease in tridol’s selling price.
C. An increase in anticipated sales of petrol relative to sales of septine and tridol.
Since petrol is the company’s most profitable product, it has a higher unit contribution margin than septine and tridol. Thus, an increase in sales of petrol relative to the other products will result in a higher weighted-average unit contribution margin and a lower breakeven point (Fixed costs ÷ Weighted-average UCM).
A manufacturer plans to produce two products, Product C and Product F, during the next year, with the following characteristics.
Product C
Selling price per unit $10
Variable cost per unit $8
Expected sales (units) 20,000
Product F
Selling price per unit $15
Variable cost per unit $10
Expected sales (units) 5,000
Total projected fixed costs for the company are $30,000. Assume that the product mix would be the same at the breakeven point as the expected level of sales of both products. What is the projected number of units (rounded) of Product C to be sold at the breakeven point?
A. 11,538
B. 2,308
C. 15,000
D. 9,231
D. 9,231
The composite unit contribution margin (composite UCM) is the combined UCM of the individual products.
Composite UCM = {$10-$8) x [20,000 / (20,000 + 5,000)]} + {($15 - $10) x [5,000 / (20,000 + 50,000)]}
=($2 x 80%) + ($5 x 20%)
= 1.60 + 1.00
= 2.60
The total breakeven point is then calculated.
Total BEP in units = Fixed costs / composite UCM
= $30,000 / $2.60
= 11,538.46
The breakeven point for a single product is its proportion of the total.
BEP for product C = 11,538.46 x 80%
= 9,230.77
A not-for-profit social agency provides home health care assistance to as many patients as possible. Its budgeted appropriation (X) for next year must cover fixed costs of $5 million, and the annual per-patient cost (Y) of its services. However, the agency is preparing for a possible 10% reduction in its appropriation that will lower the number of patients served from 5,000 to 4,000. The reduced appropriation and the annual per-patient cost equal
Reduced Appropriation / Per-patient Annual Cost
A. $5,000,000 / $4,000
B. $10,000,000 / $5,000
C. $8,333,333 / $833
D. $9,000,000 / $1,000
D. $9,000,000 / $1,000
This question applies CVP analysis in a not-for-profit context in which the agency wishes to assist as many people as possible. Thus, a breakeven point must be calculated. Total revenue (the appropriation) equals fixed cost plus the product of unit variable cost (per-patient annual cost) and the number of patients who can be assisted given the available resources. The following are simultaneous equations stated in the two unknowns:
X - 5,000Y = $5,000,000
.9X - 4,000Y = $5,000,000
Because X must equal 5,000Y + $5,000,000, the second equation may be solved as follows for the per patient annual cost (Y):
.9(5,000Y + $5,000,000) - 4,000Y = $5,000,000
4,500Y + $4,500,000 - 4,000Y = $5,000,000
500Y = $500,000
Y = $1,000
Accordingly, the budgeted appropriation (X) must be $10,000,000 [(5,000 x $1,000) VC + $5,000,000 FC], and the reduced appropriation must be $9,000,000 ($10,000,000 x 90%)
Catfur Company has fixed costs of $300,000. It produces two products, X and Y. Product X has a variable cost percentage equal to 60% of its $10 per unit selling price. Product Y has a variable cost percentage equal to 70% of its $30 selling price. For the past several years, unit sales of Product X were 40% of total unit sales. That ratio is not expected to change.
What is Catfur’s breakeven point in dollars?
A. $857,142
B. $300,000
C. $942,857
D. $750,000
C. $942,857
Weighted-average UCM equals $7 {[$10 – ($10 × 60%)] × 40%} + {[$30 – ($30 × 70%)] × 60%}. Weighted-average selling price equals $22 [($10 × 40%) + ($30 × 60%)]. The weighted-average CMR therefore equals 0.3181818 ($7 ÷ $22), and the breakeven point in sales dollars equals $942,857 ($300,000 ÷ 0.3181818).
A company with $280,000 of fixed costs has the following data:
Product A / Product B
Sales price per unit $5 / $6
Variable costs per unit $3 / $5
Assume three units of A are sold for each unit of B sold. How much will sales be in dollars of product B at the breakeven point?
A. $200,000
B. $280,000
C. $240,000
D. $840,000
C. $240,000
The breakeven point equals fixed costs divided by unit contribution margin. The composite unit contribution margin for A and B is $7 {[3 units of A × ($5 – $3)] + [1 unit of B × ($6 – $5)]}. Thus, 40,000 composite units ($280,000 ÷ $7), including 40,000 units of B, are sold at the breakeven point. Hence, sales of B at the breakeven point equal $240,000 (40,000 units × $6).
A firm’s breakeven point is 8,000 racing bicycles and 12,000 5-speed bicycles. If the selling price and variable costs are $570 and $200 for a racer and $180 and $90 for a 5-speed, respectively, what is the weighted-average contribution margin?
A. $230
B. $370
C. $90
D. $202
D. $202
Contribution margin is selling price minus variable costs:
Racer: $570 – $200 = $370
5-Speed: $180 – $90 = $90
The sales mix dictates how much of the total CM will come from sales of each product:
Racer: 8,000 ÷ (8,000 + 12,000) = 40%
5-Speed: 12,000 ÷ (8,000 + 12,000) = 60%
Unit sales are attributable 40% to racers and 60% to 5-speeds, so 40% of the UCM for racers must be added to 60% of the UCM for 5-speeds to get the weighted-average CM. Thus, the weighted-average CM is
($370 × 40%) + ($90 × 60%) = $202
A company sells two products with the following results for the year just ended.
Product 1 / Product 2
Sales $12,000,000 / $3,000,000
Variable costs 4,800,000 / 1,500,000
Fixed costs 5,400,000 / 400,000
Assuming the product mix and the sales mix remain the same, the company’s breakeven point in sales dollars is
A. $9,800,000
B. $10,000,000
C. $13,810,000
D. $12,100,000
B. $10,000,000
The current total sales of $15,000,000 consists of 80% Product 1 (P1) and 20% Product 2 (P2). The variable cost percentage is 40% for P1 and 50% for P2. Alternatively, the total variable costs are $6,300,000 ($4,800,000 + $1,500,000) on $15,000,000 of total sales, or 42%. Thus, the contribution margin percentage on the two products is 60% on P1 and 50% on P2, respectively. The weighted average CM ratio is 58% [(60% × 80%) + (50% × 20%)]. The breakeven point is found by dividing the $5,800,000 of fixed costs by the contribution margin percentage of 58%, which results in a breakeven point of $10,000,000.
A bakery produces two types of cakes, a round cake and a heart-shaped cake. Total fixed costs for the firm are $92,000. Variable costs and sales data for these cakes are presented below.
Round Cake / Heart-shaped Cake
Selling price per unit $12 / $20
Variable cost per unit $8 / $15
Budgeted sales (units) 10,000 / 15,000
How many cakes will be required to reach the breakeven point?
A. 23,000 round cakes and 18,400 heart-shaped cakes.
B. 8,000 round cakes and 12,000 heart-shaped cakes.
C. 9,000 round cakes and 11,000 heart-shaped cakes.
D. 10,000 round cakes and 10,000 heart-shaped cakes.
B. 8,000 round cakes and 12,000 heart-shaped cakes.
In a multiproduct setting, the contribution margin of each product must be weighted according to its proportion of total sales. The bakery’s breakeven quantities can therefore be derived thusly:
Weighted UCM = {($12 – $8) × [10,000 ÷ (10,000 + 15,000)]} + {($20 – $15) × [15,000 ÷ (10,000 + 15,000)]}
= ($4 × 40%) + ($5 × 60%)
= $1.60 + $3.00
= $4.60 per composite unit
Breakeven point
= Fixed costs ÷ UCM
= $92,000 ÷ $4.60
= 20,000 composite units
The breakeven point in round cakes is therefore 8,000 units (20,000 composite × 40%), and the breakeven point in heart-shaped cakes is 12,000 units (20,000 composite × 60%).
A firm produces three inexpensive socket wrench sets that are popular with do-it-yourselfers. Budgeted information for the upcoming year is as follows.
No. 109
Selling Price $10.00
Variable Cost $ 5.50
Estimated Sales Volume 30,000 sets
No. 145
Selling Price 15.00
Variable Cost 8.00
Estimated Sales Volume 75,000 sets
No. 153
Selling Price 20.00
Variable Cost 14.00
Estimated Sales Volume 45,000 sets
Total fixed costs for the socket wrench product line is $961,000. If the company’s actual experience remains consistent with the estimated sales volume percentage distribution, and the firm desires to generate total operating income of $161,200, how many Model No. 153 socket sets will the firm have to sell?
A. 54,300
B. 181,000
C. 26,000
D. 155,000
A. 54,300
A composite unit for the firm consists of the proportions 30:75:45, representing percentages of 20%, 50%, and 30%. The per-product contribution margins that will be weighted are $4.50 ($10.00 – $5.50), $7.00 ($15.00 – $8.00), and $6.00 ($20.00 – $14.00). The weighted UCM is therefore $6.20 [($4.50 × 20%) + ($7.00 × 50%) + ($6.00 × 30%)]. The total of fixed costs and target operating income is $1,122,200 ($961,000 + $161,200). The breakeven point in composite units can be found by dividing this total target amount by the weighted UCM ($1,122,200 ÷ $6.20 = 181,000). Since Model 153 represents 30% of this, the total of that model produced will be 54,300 (181,000 × 30%).
A company sells two products, X and Y. The sales mix consists of a composite unit of 2 units of X for every 5 units of Y (2:5). Fixed costs are $49,500. The unit contribution margins for X and Y are $2.50 and $1.20, respectively.
If the company had a profit of $22,000, the unit sales must have been
Product X / Product Y
A. 32,500 / 13,000
B. 23,800 / 59,500
C. 13,000 / 32,500
D. 5,000 / 12,500
C. 13,000 / 32,500
Unit sales can be computed by adding profit to fixed costs and dividing by the composite contribution margin.
Target unit sales = (Fixed costs + Operating profit) ÷ Composite UCM
= ($49,500 + $22,000) ÷ $11
= 6,500
Thus, 13,000 units of Product X and 32,500 units of Product Y must have been sold.
Mason Enterprises has prepared the following budget for the month of July:
Product A
Selling Price Per Unit: $10.00
Variable Cost Per Unit: $4.00
Unit Sales: 15,000
Product B
Selling Price Per Unit: 15.00
Variable Cost Per Unit: 8.00
Unit Sales: 20,000
Product C
Selling Price Per Unit: 18.00
Variable Cost Per Unit: 9.00
Unit Sales: 5,000
Assuming that total fixed costs will be $150,000 and the mix remains constant, the breakeven point (rounded to the next higher whole unit) will be
A. 21,429 units.
B. 21,819 units.
C. 20,455 units.
D. 6,818 units.
B. 21,819 units.
Given the constant product mix of 3:4:1 established by the budgeted unit sales, a composite unit consists of eight individual units (3 of A, 4 of B, and 1 of C). The unit contribution margins for A, B, and C are $6 ($10 selling price – $4 unit variable cost), $7 ($15 selling price – $8 unit variable cost), and $9 ($18 selling price – $9 unit variable cost), respectively. Hence, the contribution margin for a composite unit is $55 [(3 × $6) + (4 × $7) + (1 × $9)], and the breakeven point is 2,727.2727 composite units ($150,000 FC ÷ $55). This amount equals 21,819 (rounded up) individual units (8 × 2,727.2727).
Catfur Company has fixed costs of $300,000. It produces two products, X and Y. Product X has a variable cost percentage equal to 60% of its $10 per unit selling price. Product Y has a variable cost percentage equal to 70% of its $30 selling price. For the past several years, unit sales of Product X were 40% of total unit sales. That ratio is not expected to change.
How many units of Product Y will Catfur sell at the breakeven point?
A. 20,454 units.
B. 23,377 units.
C. 8,571 units.
D. 25,714 units.
D. 25,714 units.
Weighted-average UCM equals $7 {[$10 – ($10 × 60%)] × 40%} + {[$30 – ($30 × 70%)] × 60%}. The breakeven point for both products is therefore 42,857 units of which 60%, or 25,714 ($42,857 × 60%), are units of Product Y.
A corporation sells two products with the following characteristics:
Contribution margin ratio
Product 1: 40%
Product 2: 50%
Percentage of sales dollars
Product 1: 40%
Product 2: 60%
Fixed costs
Product 1: $240,000
Product 2: $700,000
The breakeven point in dollars is
A. $2,000,000
B. $2,043,478
C. $2,136,364
D. $2,088,889
B. $2,043,478
The breakeven point in dollars is obtained by calculating a weighted-average contribution ratio and dividing it into fixed costs. The ratio is calculated as follows:
CM Ratio % of sales dollars Product 1 40% × 40% = .16 Product 2 50% × 60% = .30
Weighted-average contribution ratio: .46
Total fixed costs are $940,000 ($700,000 + $240,000), so the breakeven point is equal to $2,043,478 ($940,000 ÷ .46).
A company sells two products. Product A provides a contribution margin of $3 per unit, and Product B provides a contribution margin of $4 per unit. If the sales mix shifts toward Product A, which one of the following statements is correct?
A. The overall contribution margin ratio will increase.
B. The contribution margin ratios for Products A and B will change.
C. The total number of units necessary to break even will decrease.
D. Operating income will decrease if the total number of units sold remains constant.
D. Operating income will decrease if the total number of units sold remains constant.
Since the lower contribution product now predominates in the sales mix, the composite contribution margin will decrease. Since the number of units sold remains constant, overall contribution margin and operating income will decrease.
