Mission Statement

The Rant's mission is to offer information that is useful in business administration, economics, finance, accounting, and everyday life. The mission of the People of God is to be salt of the earth and light of the world. This people is "a most sure seed of unity, hope, and salvation for the whole human race." Its destiny "is the Kingdom of God which has been begun by God himself on earth and which must be further extended until it has been brought to perfection by him at the end of time."

Wednesday, July 13, 2022

Accounting: The Language of Business - Vol. 1 (Part 125)


You have to know accounting. It’s the language of practical business life.
Charlie Munger

 Cost Behavior and Cost-Volume-Profit Analysis (Part G)

by

Charles Lamson


Sales Mix Considerations


In most businesses, more than one product is sold at varying selling prices. In addition, the products often have different unit variable costs, and each product makes a different contribution to profits. Thus, the sales volume necessary to break even or to earn a target profit for a business selling two or more products depends upon the sales mix. The sales mix is the relative distribution of sales among the various products sold by a business.


To illustrate the calculation of the break-even point for a company that sells more than one product, assume that Cascade Company sold 8,000 units of Product A and 2,000 units of Product B during the past year. The sales mix for products A and B can be expressed as percentages (80% and 20%) or as a ratio (80:20).


Cascade Company's fixed costs are $200,000. The unit selling prices, unit variable costs, and unit contribution margins for products A and B are as follows:




In computing the break-even point, it is useful to think of the individual products as components of one overall enterprise product. For Cascade Company, its overall enterprise product is called E. We can think of the unit selling price of E as equal to the total of the unit selling prices of Products A and B, multiplied by their sales mix percentages. Likewise, we can think of the unit variable cost (the costs of each unit of goods that a company produces) and unit contribution margin (the selling price per unit minus the variable cost per unit) of E as equal to the total of the unit variable costs and unit contribution margins of Products A and B, multiplied by the sales mix percentages. These computations are as follows: 



The break-even point of 8,000 units of E can be determined in the normal manner as follows:


Break-even sales (units) = Fixed costs / Unit contribution margin


Break-even sales (units) = $200,000 / $25 = 8,000 units


Since the sales mix for products A and B is 80% and 20%, the break-even quantity of A is 6,000 units (8000 units * 80%) and B is 1,600 units (8,000 units * 20%). This analysis can be verified in the following income statement:


                      


The effects of changes in the sales mix on the break-even point can be determined by repeating this analysis, assuming a different sales mix. 


*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 842-843*


end

No comments:

Post a Comment