Question

The Janowski Company has three product lines of beer mugs dash—​A, ​B, and —with contribution margins of $5​,$ 4and $ 2respectively. The president foresees sales of 238,000 units in the coming​ period, consisting of 34,000 units of​ A, 136,000 units of​ B and 68,000 units of C. The​ company's fixed costs for the period are $525,000.

Questions

1.What is the​ company's breakeven point in​ units, assuming that the given sales mix is​ maintained

2.If the sales mix is​ maintained, what is the total contribution margin when 238,000 units are​ sold? What is the operating​ income?

3.What would the operating income be if the company sold 34,000 units of​ A, 68,000 units of​ B, and 136,000 units of​ C? What is the new breakeven point in units if these relationships persist in the next​ period? 4.Comparing the breakeven points in requirements 1 and​ 3, is it always better for a company to choose the sales mix that yields the lower breakeven​ point? Explain

Answer 1

Answer 1.

Sales Mix of Product A, B and C is 34,000 : 136,000 : 68,000 or 1 : 4 : 2

Contribution Margin of Product A, B and C is $5, $4 and $2 respectively.

Contribution Margin of Sale Mix = $5 * 1/7 + $4 * 4/7 + $2 * 2/7 = 5/7+16/7+4/7 = 25/7
Contribution Margin of Sale Mix = $25/7 or 3.57

Fixed Expenses = $525,000

Break-even Point in units = Fixed Expenses / Contribution Margin of Sale Mix
Break-even Point in units = $525,000 /( $25/7) = 525,000 x 7 / 25= 147,000
Break-even Point in units = 147,000

Unit of Product A = 147,000 * 1/7 = 21,000
Unit of Product B = 147,000* 4/7 = 84,000
Unit of Product C = 147,000 * 2/7 = 42,000

Answer 2.

Number of Units sold = 238,000

Contribution Margin of Sale Mix = 238,000 * $25 / 7
Contribution Margin of Sale Mix = $850,000

Operating Income = Contribution Margin of Sale Mix - Fixed Expenses
Operating Income = $850,000 - $$525,000
Operating Income = $325,000

Answer 3.

Sales Mix of Product A, B and C is 34,000 : 68,000 : 136,000 or 1 : 2 : 4

Contribution Margin of Product A, B and C is $5, $4 and $2 respectively.

Contribution Margin of Sale Mix = $5 * 1/7 + $4 * 2/7 + $2 * 4/7 = 5/7+8/7+8/7=21/7
Contribution Margin of Sale Mix = $3

Fixed Expenses =$525,000

Number of Units sold = 238,000

Contribution Margin of Sale Mix = 238,000 * $3
Contribution Margin of Sale Mix = $714,000

Operating Income = Contribution Margin of Sale Mix - Fixed Expenses
Operating Income = $714,000 - $$525,000
Operating Income = $189,000

Break-even Point in units = Fixed Expenses / Contribution Margin of Sale Mix
Break-even Point in units =$525,000 / $3
Break-even Point in units =175,000

Unit of Product A = 175,000 * 1/7 = 25,000
Unit of Product B =175,000 * 2/7 =50,000
Unit of Product C = 175,000 * 4/7 = 100,000

Answer 4.

No, it is not always better to choose the sales mix with the lowest breakeven point because this calculation ignores the demand for the various products. The company should look to and sell as much of each of the three products as it can to maximize operating income even if this means that this sales mix results in a higher breakeven point.