Question

Sales mix, multiple product breakeven, business risk, quality of information Keener produces
two products: regular boomerangs and premium boomerangs. Last month 1,200 units of regular and 2,400 units of premium were produced and sold. Average prices and costs per unit for the month are displayed here.
REGULAR PREMIUM

SELLING PRICE $22.15 $45.30

VARIABLE COSTS $4.31 $6.91

PRODUCT LINE FIXED COST $8.17 $24.92

CORPORATE FIXED COST $5.62 $5.62

OPERATING PROFIT $4.05 $7.85

A. Assuming the sales mix remains constant, how many units of premium will be sold each time a unit of regular is sold?
B. What are the total fixed product line costs for each product?

C. What are the total corporate fixed costs?

D. What is the overall corporate breakeven in total revenue and for each product, assuming thesales mix is the same as last month’s?

E.  What is the breakeven in revenues for regular boomerangs, ignoring corporate fixed costs?

F. Why is the breakeven for regular boomerangs different when we calculate the individual product breakeven versus the combined product breakeven?

Answer 1

Requirement a:

Two units of premium boomerangs will be sold each time one regular unit is sold

(2,400 units ÷1,200 units) = 2 units

Requirement b: Compute total fixed product line cost as follows

Particulars	Regular	Premium
Number of units	1,200	2,400
×    Fixed product line cost per unit	$8.17	$24.92
Total fixed product line cost	$9,804	$59,808

Requirement c: Compute total corporate fixed cost as follows

Particulars	Regular	Premium	Total
Number of units	1,200	2,400	3,600
×   Corporate fixed cost per unit	$5.62	$5.62
Total corporate fixed costs	$6,744	$13,488	$20,232

Requirement d: Compute overall corporate breakeven revenue and for each product as follows

Particulars	Regular	Premium	Total
Number of units	1,200	2,400
× Selling price per unit	$22.15	$45.30
(a) Total sales revenue	$26,580	$108,720	$135,300
Number of units	1,200	2,400
× Variable cost per unit	$4.31	$6.91
(b) Total variable costs	$5,172	$16,584	$21,756
(c) Contribution margin (a) − (b)	$21,408	$92,136	$113,544
(d) Contribution margin ratio (c) ÷ (a)	80.54%	84.75%	83.92%
Fixed costs
Total fixed product line cost	$9,804	$59,808	$69,612
Total corporate fixed costs	$6,744	$13,488	$20,232
(e) Total fixed costs	$16,548	$73,296	$89,844
Breakeven point in total revenue (e) ÷ (d)	$20,546	$86,489	$107,059

Overall corporate breakeven revenue = $107,059

Regular breakeven revenue = $20,546

Premium breakeven revenue = $86,489

Requirement e: Compute breakeven revenues for regular product as follows

Particulars	Regular
Number of units	1,200
× Selling price per unit	$22.15
(a) Total sales revenue	$26,580
Number of units	1,200
× Variable cost per unit	$4.31
(b) Total variable costs	$5,172
(c) Contribution margin (a) − (b)	$21,408
(d) Contribution margin ratio (c) ÷ (a)	80.54%
Fixed costs
(e) Total fixed product line cost	$9,804
Breakeven revenue (e) ÷ (d)	$12,173

Requirement f: It is different because corporate fixed cost of $6,744 was allocated to regular product. This caused an increase in breakeven revenue so that the allocated corporate fixed cost is covered.