Question

Sandhill Bottle Shop has two divisions, Wine and Beer. The sales mix is 70% Wine and 30% Beer. Sandhill’s annual fixed costs are estimated at $342000. The average selling price in the Wine division is $45 with a variable cost of $18. The average selling price in the Beer division is $18 with a variable cost of $9. What is Sandhill’s sales revenue at the break-even point?

a. $194940

b. $600000

c. $942000

d. $342000

Answer 1

Answer:

For Wine Division:
Contribution Margin per unit = Selling price per unit – Variable Cost per unit
Contribution Margin per unit = $45 - $18
Contribution Margin per unit = $27

Contribution Margin ratio = Contribution Margin per unit / Selling price per unit * 100
Contribution Margin ratio = $27 / $45 * 100
Contribution Margin ratio = 60%

For Beer Division:
Contribution Margin per unit = Selling price per unit – Variable Cost per unit
Contribution Margin per unit = $18 - $9
Contribution Margin per unit = $9

Contribution Margin ratio = Contribution Margin per unit / Selling price per unit * 100
Contribution Margin ratio = $9 / $18 * 100
Contribution Margin ratio = 50%

Weighted Average Contribution Margin ratio = (Weight of Wine Division * Contribution Margin ratio of wine division) + (Weight of Beer Division * Contribution Margin ratio of beer division)
Weighted Average Contribution Margin ratio = (0.70 * 60%) + (0.30 * 50%)
Weighted Average Contribution Margin ratio = 57%

Company’s Break Even Point = Fixed Cost / Weighted Average Contribution Margin ratio
Company’s Break Even Point = $342,000 / 0.57
Company’s Break Even Point = $600,000

The Sandhill’s sales revenue at the break even point is $600,000