The Break-Even Point and the Sales Mix

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 (which most companies do!). 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

  1. We have production space and labor for 2750 products total.
  2. 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

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