Question
Mowing Motors sells two different products. Here are the monthly revenues and costs: Product A Sales quantity: 12,000 units Price per unit: $5.50 Variable costs
Mowing Motors sells two different products. Here are the monthly revenues and costs:
Product A
- Sales quantity: 12,000 units
- Price per unit: $5.50
- Variable costs per unit: $1.15
Product B
- Sales quantity: 18,000 units
- Price per unit: $3.00
- Variable costs per unit: $0.90
- Total fixed costs: $225,000
Assuming the sales mix stays the same, what is the breakeven point for this company in units?
-
Product A: 30,000; Product B: 45,000
Correct!
-
Product A: 16,000; Product B: 24,000
-
Product A: 15,000; Product B: 22,500
-
Product A: 40,000; Product B: 60,000
Incorrect.
The correct answer is calculated as follows:
Total | |||
Sales | $66,000 | $54,000 | $120,000 |
Variable cost | (13,800) | (16,200) | (30,000) |
Contribution margin | $52,200 | $37,800 | $90,000 |
Contribution margin ratio: 75% | |||
Breakeven sales: $225,000/75.0% = $300,000 | |||
(With same sales mix) | A | B | Total |
Breakeven sales | $165,000 | $135,000 | $300,000 |
Breakeven variable cost | (34,500) | (40,500) | (75,000) |
Contribution margin | $130,500 | $94,500 | $225,000 |
Fixed cost | (225,000) | ||
Profit | $0 | ||
Breakeven units | 30,000 | 45,000 |
Alternate solution:
The sales mix is the relative proportion of total units sold (or total sales dollars) that is represented by each of a companys products. In this problem, the sales mix ratio is 2:3 (12,000:18,000). Therefore, a basket containing these number of products would have a sales price of (2 $5.50) + (3 $3.00) = $20.00 and a variable cost of (2 $1.15) + (3 $0.90) = $5.00. Hence, the breakeven calculation would be like this:
$20x $5x $225,000 = 0
$15x = $225,000
x = 15,000 baskets
Recall that each basket contains two units of Product A and three units of Product B. Therefore, using the mix ratio, you know that Mowing Motors needs to sell 30,000 units of Product A and 45,000 units of Product B.
Can someone explain this? Where did the breakeven sales comes from?
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