Question

Compute the break even point for a multi product company and explain the effects of shifts in the sales mix on CM and the break even point. What assumption is usually made concerning sales mix in CVP analysis. Explain how a shift in the sales mix could result in a higher break even point and a lower net income.

Answer 1

The proportion in which a multi-product company sells its products is referred to as sales mix. Companies involved in selling two or more products try to sell their products in a proportion or mix that maximizes their total profit.

A business with low sales volume may earn more profit than a business with high sales volume if it has a large proportion of high margin products in its sales mix.

A business is not always free to sell any number of units of a product that generates the highest margin for the company. Because the sale depends on a number of external factors such as user’s demand for the product, supply of raw materials, company’s production capacity, restrictions imposed by government etc. Since sale depends on some uncontrollable factors, the ultimate purpose of the companies is to find a sales mix that will generate the highest profit for them.

Shift in sales mix and break-even point:

Usually, different products have different sales prices, variable expenses and contribution margin. Therefore, any change in proportion in which the products are sold has significant impact on the break-even point. This change is known as ‘change in sales mix’ or ‘shift in sales mix’

A shift in sales mix from high contribution margin product to low contribution margin product increases the dollar sales required to break-even while a shift from low contribution margin product to high contribution margin product reduces the dollar sales required to break-even.

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