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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Sales mix and break-even sales
Data related to the expected sales of kayaks and canoes for River Sports Inc. for the current year, which is typical of recent years, are as follows:

The estimated fixed costs for the current year are $1.440.000.
Instructions

Why is the overall enterprise break-even point so different in (1) and (3)?

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula for contribution margin is as follows:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

Breakeven Point:

The Breakeven point is the level of sales at which the net profit is nil. It can be explained as a situation where the business is generating a sale that is equal to the expenses incurred and hence no profits no loss. Breakeven point in units is calculated with the help of following formula:

  Breakeven point (units) = Total Fixed Costs(Sales Price Per unit -Variable Cost per unit) 

Weighted Average Contribution Margin:

Weighted Average Contribution Margin is calculated for two products with the help of following formula:

  Weighted Average Contribution Margin = (Contribution margin of Product A * Weight of product A)                                                                       + (Contribution margin of Product B * Weight of product B)

To Indicate:

The reason for difference in overall Breakeven points

Explanation

The overall Breakeven points are different under both cases because of the different sales mixes.

The Overall Breakeven point in units is calculated as follows:

    KayaksCanoesOverall
    Unit Selling Price (A) $ 400 $ 800
    Unit Variable Cost (B) $ 240 $ 480
    Unit Contribution Margin (C) =(A-B) $ 160 $ 320
    Sales Mix (D)80%20%
    Weighted Average Contribution Margin per unit (E) = (C*D) $ 128 $ 64 $ 192
    Total Fixed Cost (F) $ 1,440,000
    Overall Breakeven point (units) (G) = (F/E)

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