Problem 18-7B Break-even analysis with composite units P4

Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.

Required

1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.

Check (1) Old plan break-even, 1,875 composite units

2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product. (Round to the next whole unit.)

(2) New plan break-even, 1,429 composite units (rounded)

Analysis Component

3. What insight does this analysis offer management for long-term planning?