Question

In: Accounting

Multiple-Product Breakeven Parker Pottery produces a line of vases and a line of ceramic figurines. Each...

Multiple-Product Breakeven

Parker Pottery produces a line of vases and a line of ceramic figurines. Each line uses the same equipment and labor; hence, there are no traceable fixed costs. Common fixed cost equals $38,400. Parker's accountant has begun to assess the profitability of the two lines and has gathered the following data for last year:

Vases Figurines
Price $40 $70
Variable cost 30 42
Contribution margin $10 $28
Number of units 1,000 500

Required:

If required, round your final answers to nearest whole value.

1. Compute the number of vases and the number of figurines that must be sold for the company to break even.

Break-even vases units
Break-even figurines units

2. Parker Pottery is considering upgrading its factory to improve the quality of its products. The upgrade will add $5,280 per year to total fixed cost. If the upgrade is successful, the projected sales of vases will be 2,000, and figurine sales will increase to 1,000 units. What is the new break-even point in units for each of the products?

Break-even vases units
Break-even figurines units

Solutions

Expert Solution

1.

Total sales units = 1000 + 500 1500
% unit sales of vases = 1000/1500 66.67%
% unit sales of figurines = 500/1500 33.33%
Weighted average selling price = 40*66.67% + 70*33.33% 50
Weighted average variable cost = 30*66.67% + 42*33.33% 34
Breakeven point = Total fixed cost / ( Weighted average selling price - Weighted average variable cost ) = 38400/(50-34)    2400 units
Breakeven vases ( 2400 * 66.67% ) 1600 units
Breakeven figurines ( 2400 * 33.33% ) 800 units

2. New fixed costs = 38400 + 5280 = 43680

Total sales units = 2000 + 1000 3000
% unit sales of vases = 2000/3000 66.67%
% unit sales of figurines = 1000/3000 33.33%
Weighted average selling price = 40*66.67% + 70*33.33% 50
Weighted average variable cost = 30*66.67% + 42*33.33% 34
Breakeven point = Total fixed cost / ( Weighted average selling price - Weighted average variable cost ) = 43680/(50-34)    2730 units
Breakeven vases ( 2730 * 66.67% ) 1820 units
Breakeven figurines ( 2730 * 33.33% ) 910 units

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