Question

Flesch Corporation produces and sells two products. In the most recent month, Product C90B had sales of $25,380 and variable expenses of $8,883. Product Y45E had sales of $32,550 and variable expenses of $17,902. The fixed expenses of the entire company were $24,400. If the sales mix were to shift toward Product C90B with total dollar sales remaining constant, the overall break-even point for the entire company:

A.) would increase

b.) could increase or decrease

c.) would not change

d.) would decrease

Answer 1

D) Would decrease

Explanation :

If sales mix contains both type of products [ C 90B and Y 45E ]

Sales revenue [ 25,380 + 32,550]	$ 57,930
Less: Variable cost [ 8,883 + 17,902]	$ 26,785
Contribution margin	$ 31,145

PV ratio = [contribution margin / Sales revenue] X 100%

PV ratio = [ $ 31,145 / $ 57,930 ] X100% = 53.76%

Break even sales ( dollars) = Fixed cost / PV ratio

Break even sales (dollars) = $ 24,400 / 53.76%

Break even sales ( dollars ) = $ 45,387

If sales mix contains only product (C 90B)

Sales revenue	$57,930
Less: Variable cost [8,883/25,380]X57,930	$20,276
Contribution margin	$37,654

PV ratio = [ Contribution margin / sales revenue ] X 100 %

PV ratio = [ $ 37,654 / $ 57,930 ] X 100% = 65%

Break even sales ( dollars) = Fixed cost / PV ratio

Break even sales ( dollars ) = $ 24,400 / 65% = $ 37,538

So, if sales mix shifted towards product C 90B then overall break even point for the entire company would decrease.