Question

In: Accounting

Flesch Corporation produces and sells two products. In the most recent month, Product C90B had sales...

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

Solutions

Expert Solution

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.


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