Instead, let’s talk about sales mix. This relates to the mix of products. How do changes...

Instead, let’s talk about sales mix. This relates to the mix of products. How do changes in the mix of products impact breakeven? How could a shift in sales mix result in both a higher breakeven point and a lower net income? Use specific examples from a company you know something about. (for instance, for Apple you could do laptop vs. I-series items) What are the assumptions underlying sales mix and cost volume profit that are potentially misleading?

Solutions

Expert Solution

A less favorable sales mix. Since some product (and services) have lower contribution margins than others,if a greater proportion of the lower contribution margin items are sold ,the company will need to sell more units,thereby increasing the company's break even point.

The sales mix is a calculation that determines the proportion of each product a business sell. In other words ,if a greater proportion of lower contribution margin product are sold ,the break even point will increase.

The shift in sales mix may cause both higher and lower net income. If there is a large proportion of high margin products then the net income will be higher but when the proportion of high margin product is low then there will be higher break even point and lower income.

Example

For instance ,a laptop retailer might carry five $ 500 laptops, two $1000 laptops ,and one $5000 laptop. This is a retailer sales mix. The company has a smaller investment in $ 500 laptop and will more likely receive a smaller profit on the sale of these laptop. The $5000 laptop requires a higher investment and will also return a higher profit percentage than the lower cost laptop. The break even point will be based on the current sales and costs of the laptop.

Sales mix is the component of cost volume profit analysis. CVP analysis expands the use of information provided by break even analysis.

Assumptions:

The behavior of both costs and revenue is linear throughout the relevant range of activity.
Costs can be classified accurately as either fixed or variable.
Changes in activity are the only factors those affect costs
All unit produced are sold.
When a company sells more than one type ,of product ,the sales mix will remain constant.

jeff jeffy answered 1 month ago

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