Question

You are a new consultant with the Boston Group and have been sent to advise the executives of penury Company. The company recently acquired product line L from an out-of-state concern and now plans to produce it, along with its old standby K, under one roof in a newly renovated facility. Management is quite proud of the acquisition, contending that the larger size and related cost savings will make the company far more profitable. The planner results of the month’s operations, based on management’s best estimates of the maximum product demanded at today’s selling price are:

	LINE K		LINE L
	Amount	Per unit	Amout	Per unit	Total
Sale revenue	$ 120,000.00	$    1.20	$ 80,000.00	$    0.80	$ 200.00
Variable expense	60000	0.60	60000	0.60	120
Contribution margin	$   60,000.00	$    0.60	$ 20,000.00	$    0.20	$   80.00
Fixed expense					50.00
Net income					$   30.00

  

Required:

Based on historical operations, K alone incurred fixed expenses of $40,000, and L alone incurred fixed expenses of $20,000. Find the break-even point in sales dollars and units for each product separately.

Give reasons why the fixed cost for the two products combined are expected to be less than the sum of the fixed costs of each product line operating as a separate business.

Answer 1

Product K:

	Income statement
	Particulars	Per unit	Total
	Units		1,00,000
	Sales revenue	1.20	1,20,000
	Minus:
	Variable cost	0.60	60,000
	Contribution	0.60	60,000
	Minus:
	Fixed cost		40,000
	Net operating income		20,000
Contribution margin ratio
Ref	Particulars		Amount
a	Sales revenue		1,20,000
b	Contribution		60,000
c=b/a *100	Contribution margin ratio		50%

Break even point				Break even point
a	Contribution per unit	0.60		a	Contribution margin ratio	50%
b	Fixed costs	40,000		b	Fixed costs	40,000
c=b/a	BEP units	66,666.67		c=b/a	BEP sales	80,000

Product L;

	Income statement
	Particulars	Per unit	Total
	Units		1,00,000
	Sales revenue	0.80	80,000
	Minus:
	Variable cost	0.60	60,000
	Contribution	0.20	20,000
	Minus:
	Fixed cost		20,000
	Net operating income		-
Contribution margin ratio
Ref	Particulars		Amount
a	Sales revenue		80,000
b	Contribution		20,000
c=b/a *100	Contribution margin ratio		25%
Break even point				Break even point
a	Contribution per unit	0.20		a	Contribution margin ratio	25%
b	Fixed costs	20,000		b	Fixed costs	20,000
c=b/a	BEP units	1,00,000.0		c=b/a	BEP sales	80,000

When operating commonly some common costs can be eliminated such as:

Additional warehouses, additional personnel, Rents, etc..

these benefits are called synergy.

Some operations can be redundant which are eliminated on combining together. Like administration and accounting department which only one can take care of two products accounting.