Veren Inc. produces and sells two products. During the most recent month, Product F73A's sales were $27,000 and its variable expenses were $9,450. Product L75P's sales were $14,000 and its variable expenses were $5,310. The company's fixed expenses were $21,060. Required: a. Determine the overall break-even point for the company in total sales dollars.b. If the sales mix shifts toward Product F73A with no change in total sales, what will happen to the break-even point for the company?
What will be an ideal response?
a.
| Product F73A | Product L75P | Total | |||||||
| Sales | $ | 27,000 | $ | 14,000 | $ | 41,000 | |||
| Variable expenses | 9,450 | 5,310 | 14,760 | ||||||
| Contribution margin | $ | 17,550 | $ | 8,690 | 26,240 | ||||
| Fixed expenses | 21,060 | ||||||||
| Net operating income | $ | 5,180 | |||||||
Overall CM ratio = Total contribution margin ÷ Total sales
= $26,240 ÷ $41,000 = 0.64
Break-even point in total sales dollars = Fixed expenses ÷ Overall CM ratio
= $21,060 ÷ 0.64 = $32,906
b.
| Product F73A | Product L75P | |||||
| Sales (a) | $ | 27,000 | $ | 14,000 | ||
| Contribution margin (b) | $ | 17,550 | $ | 8,690 | ||
| CM ratio (b)÷(a) | 0.650 | 0.621 | ||||
Because Product F73A's CM ratio is greater than Product L75P's, a shift in the sales mix toward Product F73A will result in a decrease in the company's overall break-even point.
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