Question

A company produces and sells two products – A and B. During January 2020 A were sold at the
amount of $19,200 and its variable expenses were $6,336. B were sold at the amount of $32,800
and its variable expenses were $11,344. Fixed expenses were $32,280.
Compute
1. Break-even point for the company in total sales dollars. Show your calculation

2. If the sales mix shifts toward A without changes in total sales, what is the company’s break-
even point? Explain.

Answer 1

Answer 1)

Calculation of break-even point of the company is total sales dollars

Break-even point in sales dollars = Total fixed expenses/overall contribution margin ratio

                                                             = $ 32,280/ 66%

                                                             = $ 48,909.09 or $ 48,909 (rounded off)

Therefore break-even point in sales dollars of the company is $ 48,909.

Working Note:

Calculation of overall contribution margin ratio:

Particulars	A	B	Total
Sales                                (a)	$19,200	$32,800	$52,000
Less: Variable Expenses	$6,336	$11,344	$17,680
Contribution margin (b)	$12,864	$21,456	$34,320
Contribution margin ratio (a/b)	67.00%	65.41%	66.00%

Therefore overall contribution margin ratio of the company is 66%.

Answer 2)

Calculation of break-even point of the company is total sales dollars

Break-even point in sales dollars = Total fixed expenses/ contribution margin ratio of product A

                                                             = $ 32,280/ 67%

                                                             = $ 48,179.10 or $ 48,179 (rounded off)

If the total sales of the company are shifted to Product A, its total sales will become $ 52,000. However, since the contribution margin ratio of product A (i.e. 67%) is higher than overall contribution margin ratio of both products (i.e. 66%), the break-even sales in dollars has reduced from $ 48,909 to $ 48,179. It implies that the company will be able to break-even earlier than before and earn higher profit (given that other things being constant).