Learning Outcomes
- Analyze the break-even point data for a company that wants to adjust its sales mix
What if your company sells more than one product? Most companies sell more than one product. How do we go about figuring the break even point when we decide to adjust our sales mix?
This is a complex question. After watching the video, take a look at an additional example, with three products in the mix.
Let’s say your company makes three products:
- Product 1: Sells for $40 with variable costs of $20 each.
- Product 2: Sells for $10 with variable costs of $2 each
- Product 3: Sells for $20 with variable costs of $15 each.
Note the difference in contribution margin for each product.
- Product 1 contributes $20 to cover fixed expenses per item sold.
- Product 2 contributes $8 to cover fixed expenses per item sold.
- Product 3 contributes $5 to cover fixed expenses per item sold.
So, let’s look at the current sales mix, contribution margins and fixed costs.
| Product Type | Product #1 | Product #2 | Product #3 | Total |
|---|---|---|---|---|
| Quantity | 500 | 1500 | 750 | 2750 |
| Total Sales | $20,000 | $15,000 | $15,000 | 50000 |
| Variable Costs | $10,000 | $3,000 | $11,250 | 24250 |
| Contribution Margin | $10,000 | $12,000 | $3,750 | 25750 |
| Fixed Costs | $19,000 | |||
| Net Profit | $6,750 |
Now, let’s also assume that this mix uses all of the manufacturing space, all of the time!! What happens if we suddenly have a huge demand for product #3, the one contributing the least to the contribution margin? We look at reallocating space to produce more of product #3, but that means we need to produce less of products #1 and #2 that contribute more to our contribution margin
Let’s take a look at what happens if our sales mix shifts. We are making a couple of assumptions
- We have production space and labor for 2750 products total.
- Variable costs remain the same per item, regardless of quantity.
So, if we shift our production to making more of product #3
| Product Type | Product #1 | Product #2 | Product #3 | Total |
|---|---|---|---|---|
| Quantity | 125 | 1000 | 1625 | 2750 |
| Total Sales | $5,000 | $10,000 | $32,500 | 47500 |
| Variable Costs | $2,500 | $2,000 | $24,375 | 28875 |
| Contribution Margin | $2,500 | $8,000 | $8,125 | 18625 |
| Fixed Costs | $19,000 | |||
| Net Profit | $375 |
We are still making the exact same number of products, but due to the contribution margin being lower on product #3, we are now showing a net loss rather than a profit.
Companies make these kinds of decisions on a daily basis. As a manager, you may be asked to determine a product mix that is profitable for your company. Keep the contribution margin, manufacturing space and labor in mind as you work through this process.
Practice Questions
