In: Accounting
A company sells three products A, B and C in a 3:3:4 sales mix.
Sales price: A - $10 B -$8 C - $6
Variable cost: A - $7 B- $3 C - $3
Quantity sold A 6,000 B6000 C8000
Fixed costs are $36,000
A) 6% - Calculate breakeven in total sales dollars and in units of the 3 products
B) 5% - What is the total income the company can earn with this sales mix?
Say the sales mix changes to 4;3:3 with total quantity sold of 20,000
C) 6% -What is the breakeven point in sales dollars and units?
D) 5% - What is the total income the company can earn with this sales mix?
E) 3% - Explain why though the sale mix changed the income in parts B and D is the same
A) Break even total sales in units
= Total fixed expenses / (Weighted average selling price – Weighted average variable cost)
Weighted average selling price
= (Sale price of product A * Sales ratio of product A) + (Sale price of product B * Sale ratio of product B) + (Sale price of product C * Sales ratio of product C)
= [10 * (3/10)] + [8 * (3/10)] + [6 * (4/10)]
= 3 + 2.4 + 2.4
= $7.8
Weighted average variable cost
= (Variable cost of product A * Sales ratio of product A) + (Variable cost of product B × Sales ratio of product B) + (Variable cost of product C × Sales ratio of product C)
= [7 * (3/10)] + [3 * (3/10)] + [3 * (4/10)]
= 2.1 + 0.9 + 1.2
= $4.2
So, Break even total sales in units
= Total fixed expenses / (Weighted average selling price – Weighted average variable cost)
= 36000 / (7.8 – 4.2)
= 10000 units
So the company has to sell 10000 units to break even. Now number of units sold of each product to breakeven :
Product A [10000*(3/10)] = 3000 units
Product B [10000*(3/10)] = 3000 units
Product C [10000*(4/10)] = 4000 units
Break even point in dollars
= (Breakeven units of product A * Sales price of product A) + (Breakeven units of product B * Sales price of product B) + (Breakeven units of product C * Sales price of product C)
= (3000*10) + (3000*8) + (4000*6)
= $78000
B) Total Income of Company with sale mix between A,B,C being 3:3:4 |
||
Particulars |
Amount ($) |
Amount ($) |
Sales |
||
Product A (6000*10) |
60000 |
|
Product B (6000*8) |
48000 |
|
Product C (8000*6) |
48000 |
156000 |
Less : Variable Cost |
||
Product A (6000*7) |
42000 |
|
Product B (6000*3) |
18000 |
|
Product C (8000*3) |
24000 |
84000 |
Contribution |
72000 |
|
Less: Fixed Cost |
36000 |
|
Total Income |
36000 |
C)
Sale Mix between A, B, C = 4:3:3
Break even total sales in units
= Total fixed expenses / (Weighted average selling price – Weighted average variable cost)
Weighted average selling price
= (Sale price of product A * Sales ratio of product A) + (Sale price of product B * Sale ratio of product B) + (Sale price of product C * Sales ratio of product C)
= [10 * (4/10)] + [8 * (3/10)] + [6 * (3/10)]
= 4 + 2.4 + 1.8
= $8.2
Weighted average variable cost
= (Variable cost of product A * Sales ratio of product A) + (Variable cost of product B × Sales ratio of product B) + (Variable cost of product C × Sales ratio of product C)
= [7 * (4/10)] + [3 * (3/10)] + [3 * (3/10)]
= 2.8 + 0.9 + 0.9
= $ 4.6
So, Break even total sales in units
= Total fixed expenses / (Weighted average selling price – Weighted average variable cost)
= 36000 / (8.2 – 4.6)
= 10000 units
So the company has to sell 10000 units to break even. Now number of units sold of each product to breakeven :
Product A [10000*(4/10)] = 4000 units
Product B [10000*(3/10)] = 3000 units
Product C [10000*(3/10)] = 3000 units
Break even point in dollars
= (Breakeven units of product A * Sales price of product A) + (Breakeven units of product B * Sales price of product B) + (Breakeven units of product C * Sales price of product C)
= (4000*10) + (3000*8) + (3000*6)
= $82000
D) Sales units of A, B, C with sales mix ratio of 4:3:3
Sales of Product A = 20000*(4/10) = 8000 units
Sales of Product A = 20000*(3/10) = 6000 units
Sales of Product A = 20000*(3/10) = 6000 units
Total Income of Company with sale mix between A,B,C being 4:3:3 |
||
Particulars |
Amount ($) |
Amount ($) |
Sales |
||
Product A (8000*10) |
80000 |
|
Product B (6000*8) |
48000 |
|
Product C (6000*6) |
36000 |
164000 |
Less : Variable Cost |
||
Product A (8000*7) |
56000 |
|
Product B (6000*3) |
18000 |
|
Product C (6000*3) |
18000 |
92000 |
Contribution |
72000 |
|
Less: Fixed Cost |
36000 |
|
Total Income |
36000 |
E ) The income of Part B and Part D are same because :
So the increased contribution of Product A due to increase in sales is settled by an equal amount of decreased contribution of Product C due of decrease in sales after change of sale mix.
The sales of Product B is same in both the sale mix.
Therefore, the income of Part B ($36000) and Part D ($36000) is same.