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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

Einhorn Company has fixed costs of $105,000. 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 QQ and ZZ is 40% and 60%, respectively. Determine the break-even point in units of QQ and ZZ.

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 QQ and Product ZZ.

Explanation

Determine: the break-even point in sales units:

For Product QQ

Break-even point in sales units for Product E =4,375 units (4)

Sales Mix for Product QQ =40%

Break-evenpointinSales(units)forProductQQ] =(Break-evenpointinSales(units)forProductQQ)×(SalesmixforProductQQ)=4,375units×40%=1,750units

For Product ZZ

Break-even point in sales units for Product E =4,375 units (4)

Sales Mix for Product ZZ =60%

Break-evenpointinSales(units)forProductZZ] =(Break-evenpointinSales(units)forProductZZ)×(SalesmixforProductZZ)=4,375units×60%=2,625units

Working notes:

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

Determine the selling price per unit of Product E.

SellingpriceperunitofProductE]=(SellingpriceperunitofProductQQ×salesmixofProductQQ)+(SellingpriceperunitofProductZZ×salesmixofProductZZ)=($50perunit×40%)+($60perunit×60%)=$20perunit+$36perunit=$56perunit (1)

Determine the variable cost per unit of Product E

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