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Problem 18-7B Break-even analysis with composite units P4 Milano Co. manufactures and sells three products: product...

Problem 18-7B Break-even analysis with composite units P4

Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.

Required

  1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.

Check (1) Old plan break-even, 1,875 composite units

  1. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product. (Round to the next whole unit.)

(2) New plan break-even, 1,429 composite units (rounded)

Analysis Component

  1. What insight does this analysis offer management for long-term planning?

Solutions

Expert Solution

OLD PLAN

Selling Price per composite unit
Products Ratio Selling price per unit Total selling Price per composite unit
P1 6 $40 $240
P2 4 $30 $120
P3 2 $20 $40
$400
Variable cost per composite unit
Products Ratio Variable cost per unit Total variable cost per composite unit
P1 6 $30 $180
P2 4 $15 $60
P3 2 $8 $16
$256

Break even points in Composite units

Fixed cost = $270,000

Contribution per unit = Selling cost per composite unit - Variable cost per unit

= $400 - $256

= $ 144 per composite unit

Break Even point = Fixed Cost / Contribution per unit

= $270,000/$144

Break Even units = 1,875 units.

Break even Point in Units and Sales dollars of each individual product
Product Quantity No. of composite units to break even No. of units sold at break even Dollar sales at break even point
P1 6 1,875 units 11,250 $450,000
P2 4 1,875 units 7,500 $225,000
P3 2 1,875 units 3,750 $75,000

NEW PLAN

Products Ratio Selling price per unit Total selling Price per composite unit
P1 6 $40 $240
P2 4 $30 $120
P3 2 $20 $40
$400
Products Ratio Variable Cost per unit Total Variable Cost per composite unit
P1 6 $20 $120
P2 4 $10 $40
P3 2 $8 $16
$176

Break Even Points in Composite Units

Fixed cost = $270,000+$50,000 = $320,000

Contribution per unit = Selling cost per composite unit - Variable cost per unit

= $400 - $176

= $ 224 per composite unit

Break Even point = Fixed Cost / Contribution per unit

= $320,000/$224

Break Even units = 1,429 units (1,428.57 units)

Break even Point in Units and Sales dollars of each individual product
Product Quantity No. of composite units to break even No. of units sold at break even Dollar sales at break even point
P1 6 1,429 units 8,574 $342,960
P2 4 1,429 units 5,716 $171,480
P3 2 1,429 units 2,858 $57,160

The Analysis show that in the new plan the Break Even point is less when compared to the Old Plan in both the units and the Dollar sales,that is the amount required to cover the total costs, and so Profit can be attained soon. And so it is good for the Management to follow the new plan Break even point is less.

ekkarill92 answered 1 year ago
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