{"id":425,"date":"2018-04-17T21:29:43","date_gmt":"2018-04-17T21:29:43","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=425"},"modified":"2024-04-29T16:55:04","modified_gmt":"2024-04-29T16:55:04","slug":"the-break-even-point-and-the-sales-mix","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/the-break-even-point-and-the-sales-mix\/","title":{"raw":"The Break-Even Point and the Sales Mix","rendered":"The Break-Even Point and the Sales Mix"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Analyze the break-even point data for a company that wants to adjust its sales mix<\/li>\r\n<\/ul>\r\n<\/div>\r\nWhat 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?\r\n\r\nThis is a complex question.\u00a0After watching the video, take a look at an additional example, with three products in the mix.\r\n\r\n<iframe src=\"\/\/plugin.3playmedia.com\/show?mf=6481451&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=L1dqTP5DXEI&amp;video_target=tpm-plugin-s5mmardh-L1dqTP5DXEI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe>\r\n\r\nLet\u2019s say your company makes three products:\r\n<ul>\r\n \t<li><strong>Product 1:<\/strong> Sells for $40 with variable costs of $20 each.<\/li>\r\n \t<li><strong>Product 2:<\/strong> Sells for $10 with variable costs of $2 each<\/li>\r\n \t<li><strong>Product 3:<\/strong> Sells for $20 with variable costs of $15 each.<\/li>\r\n<\/ul>\r\nNote the difference in contribution margin for each product.\r\n<ul>\r\n \t<li>Product 1 contributes $20 to cover fixed expenses per item sold.<\/li>\r\n \t<li>Product 2 contributes $8 to cover fixed expenses per item sold.<\/li>\r\n \t<li>Product 3 contributes $5 to cover fixed expenses per item sold.<\/li>\r\n<\/ul>\r\nSo, let\u2019s look at the current sales mix, contribution margins and fixed costs.\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<thead>\r\n<tr>\r\n<th scope=\"row\">Product Type<\/th>\r\n<th scope=\"col\">Product #1<\/th>\r\n<th scope=\"col\">Product #2<\/th>\r\n<th scope=\"col\">Product #3<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Quantity<\/th>\r\n<td>500<\/td>\r\n<td>1500<\/td>\r\n<td>750<\/td>\r\n<td>2750<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Total Sales<\/th>\r\n<td>$20,000<\/td>\r\n<td>$15,000<\/td>\r\n<td>$15,000<\/td>\r\n<td>50000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Variable Costs<\/th>\r\n<td>$10,000<\/td>\r\n<td>$3,000<\/td>\r\n<td>$11,250<\/td>\r\n<td>24250<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Contribution Margin<\/th>\r\n<td>$10,000<\/td>\r\n<td>$12,000<\/td>\r\n<td>$3,750<\/td>\r\n<td>25750<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Fixed Costs<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>$19,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net Profit<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>$6,750<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNow, let\u2019s also assume that this mix uses <em>all<\/em> of the manufacturing space, all of the time!! What happens if we suddenly have a huge demand for product #3, the one contributing the <strong>least<\/strong> to the contribution margin? We look at reallocating space to produce <strong>more<\/strong> of product #3, but that means we need to produce less of products #1 and #2 that contribute more to our contribution margin\r\n\r\nLet\u2019s take a look at what happens if our sales mix shifts. We are making a couple of assumptions\r\n<ol>\r\n \t<li style=\"font-weight: 400;\">We have production space and labor for 2750 products total.<\/li>\r\n \t<li style=\"font-weight: 400;\">Variable costs remain the same per item, regardless of quantity.<\/li>\r\n<\/ol>\r\nSo, if we shift our production to making <strong>more<\/strong> of product #3\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<thead>\r\n<tr>\r\n<th scope=\"row\">Product Type<\/th>\r\n<th scope=\"col\">Product #1<\/th>\r\n<th scope=\"col\">Product #2<\/th>\r\n<th scope=\"col\">Product #3<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<th scope=\"row\">Quantity<\/th>\r\n<td>125<\/td>\r\n<td>1000<\/td>\r\n<td>1625<\/td>\r\n<td>2750<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Total Sales<\/th>\r\n<td>$5,000<\/td>\r\n<td>$10,000<\/td>\r\n<td>$32,500<\/td>\r\n<td>47500<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Variable Costs<\/th>\r\n<td>$2,500<\/td>\r\n<td>$2,000<\/td>\r\n<td>$24,375<\/td>\r\n<td>28875<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Contribution Margin<\/th>\r\n<td>$2,500<\/td>\r\n<td>$8,000<\/td>\r\n<td>$8,125<\/td>\r\n<td>18625<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Fixed Costs<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>$19,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<th scope=\"row\">Net Profit<\/th>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>$375<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe are still making the <strong>exact same<\/strong> number of products, but due to the contribution margin being lower on product #3, we are now showing a <strong>net loss<\/strong> rather than a profit.\r\n\r\nCompanies 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.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/5fcff98f-266a-436d-aa84-6872538640fb\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Analyze the break-even point data for a company that wants to adjust its sales mix<\/li>\n<\/ul>\n<\/div>\n<p>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?<\/p>\n<p>This is a complex question.\u00a0After watching the video, take a look at an additional example, with three products in the mix.<\/p>\n<p><iframe loading=\"lazy\" src=\"\/\/plugin.3playmedia.com\/show?mf=6481451&amp;p3sdk_version=1.10.1&amp;p=20361&amp;pt=375&amp;video_id=L1dqTP5DXEI&amp;video_target=tpm-plugin-s5mmardh-L1dqTP5DXEI\" width=\"800px\" height=\"450px\" frameborder=\"0\" marginwidth=\"0px\" marginheight=\"0px\"><\/iframe><\/p>\n<p>Let\u2019s say your company makes three products:<\/p>\n<ul>\n<li><strong>Product 1:<\/strong> Sells for $40 with variable costs of $20 each.<\/li>\n<li><strong>Product 2:<\/strong> Sells for $10 with variable costs of $2 each<\/li>\n<li><strong>Product 3:<\/strong> Sells for $20 with variable costs of $15 each.<\/li>\n<\/ul>\n<p>Note the difference in contribution margin for each product.<\/p>\n<ul>\n<li>Product 1 contributes $20 to cover fixed expenses per item sold.<\/li>\n<li>Product 2 contributes $8 to cover fixed expenses per item sold.<\/li>\n<li>Product 3 contributes $5 to cover fixed expenses per item sold.<\/li>\n<\/ul>\n<p>So, let\u2019s look at the current sales mix, contribution margins and fixed costs.<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<thead>\n<tr>\n<th scope=\"row\">Product Type<\/th>\n<th scope=\"col\">Product #1<\/th>\n<th scope=\"col\">Product #2<\/th>\n<th scope=\"col\">Product #3<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<th scope=\"row\">Quantity<\/th>\n<td>500<\/td>\n<td>1500<\/td>\n<td>750<\/td>\n<td>2750<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Total Sales<\/th>\n<td>$20,000<\/td>\n<td>$15,000<\/td>\n<td>$15,000<\/td>\n<td>50000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Variable Costs<\/th>\n<td>$10,000<\/td>\n<td>$3,000<\/td>\n<td>$11,250<\/td>\n<td>24250<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Contribution Margin<\/th>\n<td>$10,000<\/td>\n<td>$12,000<\/td>\n<td>$3,750<\/td>\n<td>25750<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Fixed Costs<\/th>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td>$19,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net Profit<\/th>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td>$6,750<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Now, let\u2019s also assume that this mix uses <em>all<\/em> of the manufacturing space, all of the time!! What happens if we suddenly have a huge demand for product #3, the one contributing the <strong>least<\/strong> to the contribution margin? We look at reallocating space to produce <strong>more<\/strong> of product #3, but that means we need to produce less of products #1 and #2 that contribute more to our contribution margin<\/p>\n<p>Let\u2019s take a look at what happens if our sales mix shifts. We are making a couple of assumptions<\/p>\n<ol>\n<li style=\"font-weight: 400;\">We have production space and labor for 2750 products total.<\/li>\n<li style=\"font-weight: 400;\">Variable costs remain the same per item, regardless of quantity.<\/li>\n<\/ol>\n<p>So, if we shift our production to making <strong>more<\/strong> of product #3<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<thead>\n<tr>\n<th scope=\"row\">Product Type<\/th>\n<th scope=\"col\">Product #1<\/th>\n<th scope=\"col\">Product #2<\/th>\n<th scope=\"col\">Product #3<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<th scope=\"row\">Quantity<\/th>\n<td>125<\/td>\n<td>1000<\/td>\n<td>1625<\/td>\n<td>2750<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Total Sales<\/th>\n<td>$5,000<\/td>\n<td>$10,000<\/td>\n<td>$32,500<\/td>\n<td>47500<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Variable Costs<\/th>\n<td>$2,500<\/td>\n<td>$2,000<\/td>\n<td>$24,375<\/td>\n<td>28875<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Contribution Margin<\/th>\n<td>$2,500<\/td>\n<td>$8,000<\/td>\n<td>$8,125<\/td>\n<td>18625<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Fixed Costs<\/th>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td>$19,000<\/td>\n<\/tr>\n<tr>\n<th scope=\"row\">Net Profit<\/th>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td>$375<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>We are still making the <strong>exact same<\/strong> number of products, but due to the contribution margin being lower on product #3, we are now showing a <strong>net loss<\/strong> rather than a profit.<\/p>\n<p>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.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_5fcff98f-266a-436d-aa84-6872538640fb\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/5fcff98f-266a-436d-aa84-6872538640fb?iframe_resize_id=assessment_practice_id_5fcff98f-266a-436d-aa84-6872538640fb\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-425\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>The Break-Even Point and the Sales Mix. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>28. Managerial Account Ch4 Pt6: Sales Mix and Contribution Margin. <strong>Authored by<\/strong>: Mark Meldrum. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/L1dqTP5DXEI\">https:\/\/youtu.be\/L1dqTP5DXEI<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":18,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"The Break-Even Point and the Sales Mix\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"28. Managerial Account Ch4 Pt6: Sales Mix and Contribution Margin\",\"author\":\"Mark Meldrum\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/L1dqTP5DXEI\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"804bd01d-fd31-4314-8765-6285348d6423, 0497402c-78cb-4323-b34a-79aef96ed3fe","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-425","chapter","type-chapter","status-publish","hentry"],"part":107,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/425","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/425\/revisions"}],"predecessor-version":[{"id":4096,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/425\/revisions\/4096"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/107"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/425\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=425"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=425"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=425"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=425"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}