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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Sales mix and break-even analysis

Wide Open Industries Inc. has fixed costs of $475,000. The unit selling price, variable cost per unit, and contribution margin per unit for the company's two products follow:

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The sales mix for Products AA and BB is 60% and 40%, respectively. Determine the breakeven point in units of AA and BB.

To determine

Sales mix: It refers to the relative distribution of the total sales among the number of products sold by a company. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

To determine: the break-even point in sales units of Product AA and Product BB.

Explanation

Determine: the break-even point in sales units:

For Product AA

Break-even point in sales units for Product E =12,500 units (4)

Sales Mix for Product AA =60%

Break-evenpointinSales(units)forProductAA] =(Break-evenpointinSales(units)forProductAA)×(SalesmixforProductAA)=12,500units×60%=7,500units

For Product BB

Break-even point in sales units for Product E =12,500 units (4)

Sales Mix for Product BB =40%

Break-evenpointinSales(units)forProductBB] =(Break-evenpointinSales(units)forProductBB)×(SalesmixforProductBB)=12,500units×40%=5,000units

Working notes:

Note: For break-even analysis, the Product AA and Product BB are considered as the components of one overall company’s Product E.

Determine the selling price per unit of Product E.

SellingpriceperunitofProductE]=(SellingpriceperunitofProductAA×salesmixofProductAA)+(SellingpriceperunitofProductBB×salesmixofProductBB)=($145perunit×60%)+($110perunit×40%)=$87perunit+$44perunit=$131perunit (1)

Determine the variable cost per unit of Product E

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