Question

Part B

GH Artist Supply, Inc. is a new company that specializes in panels and frames for artists.

In a new product line, GH managers plan to create new, eco-friendly panels in three sizes: large, medium, and small.

The current budget plan for the first year of operations provides the following information:

	Small	Medium	Large
# of units	200	110	80
Selling price per unit	$20	$45	$90
Variable cost per unit	$14	$18	$31
Fixed costs	$5,000	$2,800	$2,200

Required

Two managers within GH are arguing about the best way to calculate the break-even point in this multi-product scenario. Each has their own method they would like to use.

Compute the break-even point using the two common methods used for multi-product scenarios.

For each method, describe the assumption that is unique to that method.

Answer 1

1. Individual break even point for each product:

Assumptions:

(i) Individual fixed costs remain constant

(ii) Individual contribution remains constant

	Small	Medium	Large
Selling price per unit	20	45	90
Less: Variable cost per unit	14	18	31
Contribution per unit	6	27	59
Fixed costs	5000	2800	2200
Break even point [Fixed costs/ Contribution per unit]	833	104	37

Break even sales in dollars = (833*20)+(104*45) +(90*37)= 24670

2. Weighted average contribution method:

Assumptions:

(i) Constant sales mix

(ii) Constant contribution margin ratio

(iii) Constant fixed cost

Fixed costs = 5000 + 2800 +2200= 10,000

Break even point = 10,000 / 45.755% = $21856

	Percent of total sales	Contribution Margin ratio	Contribution margin in sales mix ratio	Sales in break even point
Small	51.28%	30%	15.385%	11,208
Medium	28.21%	60%	16.923%	6,164
Large	20.51%	66%	13.447%	4,483
Weighted average contribution			45.755%