Question

1. You can do a BE analysis for one product or multiple products. What is the shortcoming of the multiple product analysis? What if we took that one step further and did a BE analysis on the entire company? What could be a drawback of that analysis?
2. In BE analysis we talk about fixed and variable costs. Can some costs be a little bit of both? Explain.
3. In our calculations, BE gives us the number of units we need to produce to hit breakeven. If I were to ask you to convert that into sales dollars, how would you do that?

Answer 1

1- What is the short coming of the multiple product analysis............

.break-even point of a single product company has been discussed in the break-even point analysis article. In this article, I would explain the procedure of calculating break-even point of a multi product company. A multi-product company means a company that sells two or more products.

The procedure of computing break-even point of a multi product company is a little more complicated than that of a single product company.

For computing break-even point of a company with two or more products, we must know the sales percentage of individual products in the total sales mix. This information is used in computing weighted average selling price and weighted average variable expenses.

Assumes that sales prices are constant at all levels of output. Assumes production and sales are the same. Break even charts may be time consuming to prepare. It can only apply to a single product or single mix of products.

2- In BE analysis we talk about fixed and variable costs, can some costs be a little bit of both.exlpain .

Components of BE Analysis ---- Fixed costs
Fixed costs are also called overhead costs. These overhead costs occur after the decision to start an economic activity is taken and these costs are directly related to the level of production, but not the quantity of production. Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs, labour costs, energy costs etc. These costs are fixed rrespective of the production. In case of no production also the costs must be incurred.
Variable costs
Variable costs are costs that will increase or decrease in direct relation to the production volume. These costs include cost of raw material, packaging cost, fuel and other costs that are directly related to the production.

Calculation of Break-Even Analysis

The basic formula for break-even analysis is derived by dividing the total fixed costs of production by the contribution per unit (price per unit less the variable costs).

Mixed expenses are part variable and part fixed. Sales commissions, for example, add a variable expense to fixed labour costs. The best way to handle mixed expenses in your break-even analysis is to divide them up. Place the variable portion with your variable expenses and the fixed portion with your fixed expenses.

3 - In our calculations BE gives us the number of units we need to produce to hit break even, if I were to ask to ask you to convert that into sales dollars, how would you do that?

The break-even point is the dollar amount (total sales dollars) or production level (total units produced) at which the company has recovered all variable and fixed costs. In other words, no profit or loss occurs at break-even because Total Cost = Total Revenue. (Figure) illustrates the components of the break-even point:

Break-Even Point. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.