Question

As part of it its portfolio of products, Mahim Manufacturers Limited has three products in the fast-moving consumer goods market. The company diversified its portfolio to ensure that it has some protection against a sudden drop in the sales of any particular product. The budgeted selling price and other relevant information at the beginning of 2019 are as follows:

	Products
	P123	X456	Y789
Selling price	£300	£300	£300
Variable cost	£125	£245	£210
Sales mix	45%	33%	22%
Fixed costs	£205,000
Total revenue	£556,500

At the end of the year, the initial forecast was not achieved. The company expected to sell a large volume of P123 but X456 ended up being the most popular product. This led to a change in the actual sales mix at the end of the year. Moreover, there were also changes in the variable costs for all products due to a sudden regulatory change in the market. As a result, the company’s overall revenue did not meet the original expectations. Mahim Manufacturers Ltd.’s actual performance at the end of 2019 is as follows:

	Products
	P123	X456	Y789
Selling price	£300	£300	£300
Variable cost	£140	£285	£231
Sales mix	28%	43.2%	28.8%
Fixed costs	£205,000
Total revenue	£495,000

[CONTINUED]

Since the 2019 performance was rather frustrating for the company, its managers hired a financial analyst to evaluate the business. After analysing the actual sales data, the analyst recommended that the company drop one of its three products. He argues that the company should focus on two products and transfer the resources spent so far on the dropped product to develop a stronger marketing campaign to build up a brand image for the company and the two remaining products. The company board has accepted the analyst’s recommendations and agreed to drop a product. Thus, in the new sales mix, there are two products, each of which carries 50% weight of the total sales mix. The board instructed the marketing department to design an extensive advertising campaign for the products in the new sales mix.

Required:

a)	Calculate the break-even point for Mahim’s original sales mix of the three products in units and pounds. Support your answer by showing calculations for each product and the sales mix.

Mahim manufactures
	P 123	X 456	Y 789	Total	Total
Selling price	300.00	300.00	300.00		A
Variable cost	125.00	245.00	210.00		B
Contribution per unit	175.00	55.00	90.00		C=A-B
Sales mix	45%	33%	22%		D
Weighted Contribution per unit	78.75	18.15	19.80	116.70	E=C*D
Fixed costs				205,000.00	F
Breakeven units				1,757.00	G=F/E
Breakeven units	790.65	579.81	386.54	1,757.00	H=G*D
Selling price	300.00	300.00	300.00		See A
Breakeven sales (amount)	237,195.00	173,943.00	115,962.00	527,100.00	I=H*A

b)	How much profit does the company generate with the original sales mix?
c)	Calculate the profit of the company using the ‘end of year’ (actual) data.

Answer 1

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Mahim manufactures
Workings for Answer b	P 123	X 456	Y 789	Total	Note
Total revenue				556,500.00	A
Sales mix	45%	33%	22%		B
Product revenue	250,425.00	183,645.00	122,430.00	556,500.00	C=A*B
Selling price	300.00	300.00	300.00		D
Units sold	834.75	612.15	408.10		E=C/D
Variable cost per unit	125.00	245.00	210.00		F
Variable costs	104,343.75	149,976.75	85,701.00		G=E*F
Answer b
Income Statement	P 123	X 456	Y 789	Total	Note
Product revenue	250,425.00	183,645.00	122,430.00	556,500.00	See C
Variable costs	104,343.75	149,976.75	85,701.00	340,021.50	See G
Contribution	146,081.25	33,668.25	36,729.00	216,478.50	H=C-G
Fixed costs				205,000.00	I
Operating Profit				11,478.50	J=H-I
Workings for Answer c	P 123	X 456	Y 789	Total	Note
Total revenue				495,000.00	K
Sales mix	28%	43.2%	28.8%		L
Product revenue	138,600.00	213,840.00	142,560.00	495,000.00	M=K*L
Selling price	300.00	300.00	300.00		See D
Units sold	462.00	712.80	475.20		N=M/D
Variable cost per unit	140.00	285.00	231.00		O
Variable costs	64,680.00	203,148.00	109,771.20		P=N*O
Answer c
Income Statement	P 123	X 456	Y 789	Total	Note
Product revenue	138,600.00	213,840.00	142,560.00	495,000.00	See M
Variable costs	64,680.00	203,148.00	109,771.20	377,599.20	See P
Contribution	73,920.00	10,692.00	32,788.80	117,400.80	Q=M-P
Fixed costs				205,000.00	See I
Operating Profit (Loss)				(87,599.20)	R=Q-I