Example Exercise 5 Sales Mix and Break-Even Analysis Up until now, we’ve computed the break-even point for one product. As we know, most companies sell more than one product at different selling prices and variable costs. This is called the sales mix, which is the relative distribution of sales among the products sold by a company.

Example Exercise 5 Sales Mix and Break-Even Analysis 8,000 ÷ 10,000 Assume the given information [CLICK] for Cascade Company, which sold Products A and B during the past year. The sales mix is 80 percent for product A, or 8,000 units divided by [CLICK] total units of 10,000; and 20 percent for product B, or 2,000 units divided by [CLICK] total units of 10,000. To calculate the product mix for the company, it is helpful to think of products A and B as components of one product called product E. [CLICK] The unit selling price of E equals the sum of the unit selling prices of each product multiplied by its sales mix percentage. [CLICK] Variable costs and contribution margin are also multiplied by the sales mix percentage to determine [CLICK] the unit selling price of $100, unit variable cost of $75 and unit contribution margin of $25. 8,000 ÷ 10,000 2,000 ÷ 10,000

Example Exercise 5 Sales Mix and Break-Even Analysis Product A Product B 8,000 x 80% = 6,400 8,000 x 20% = 1,600 The break-even point for the company can now be determined [CLICK] at 8,000 units. Since the sales mix for product A is 80 percent and for product B, it’s 20 percent. The break-even quantity of A is [CLICK] 6,400 units and the break-even quantity of B is [CLICK] 1,600 units. This analysis can be verified by preparing an income statement [CLICK]. Notice that the break-even point [CLICK] is zero.

2 Example Exercise 5 $180,000 = 3,600 units $50 5 Now we can determine the break-even point for Megan Company. We’ll assume that products Q and Z are components of product E. First, we’ll determine the unit selling price of product E by multiplying the unit selling prices of each product by its sales mix percentage [CLICK] to get a to get a unit selling price of $145. We’ll do the same for the unit variable cost of $95 [CLICK] and the contribution margin of $50 [CLICK]. Now we can determine the break-even sales in units by dividing the fixed costs of $180,000 by the unit contribution margin of $50 to get [CLICK] 3,600 units. $180,000 $50 = 3,600 units

Example Exercise 5 5 5  For Practice: PE 5A, PE 5B 5 5A, 5B Refer to Practice Exercises PE 5A and PE 5B to practice sales mix and break-even analysis. 5A, 5B  For Practice: PE 5A, PE 5B