Question

How do you calculate the multi product breakeven point and level of activity required to meet a target income?

Answer 1

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

Formula:

A multi product company can compute its break-even point using the following formula:

Breakeven point =          Total Fixed Expenses / weighted average selling price –

                                                     weighted average variable expenses       

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.

In the above formula, the weighted average selling price is worked out as follows:

(Sale price of product A × Sales percentage of product A) + (Sale price of product B × Sale percentage of product B) + (Sale price of product C × Sales percentage of product C) + …….

and the weighted average variable expenses are worked out as follows:

(Variable expenses of product A × Sales percentage of product A) + (Variable expenses of product B × Variable expenses of product B) + (Variable expenses of product C × Sales percentage of product C) + …….

When weighted average variable expenses per unit are subtracted from the weighted average selling price per unit, we get weighted average contribution margin per unit. Therefore, the above formula can also be written as follows:

             Breakeven point =          Total Fixed Expenses / weighted average    

                                                          contribution margin per unit