Question

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Practice Problem 3 Americana Inc, sells three different flag types they label red, white and blue. Their unit sales prices are red, $20; white, $35; and blue, $65. The per unit variable costs to manufacture and sell these products are red, $12, white, $22; and blue, $50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $250.000. One type of raw material has been used to make all three products. The firm has developed a new material of equal quality but for less cost. The new material would reduce variable costs per unit as follows: red, by $6; white, by $12; and blue, by $10. 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. 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.

Answer 1

1	OLD MATERIAL
		Red	White	Blue	Total
	Selling price	20	35	65	120
	Variable cost	12	22	50
	Contribution margin	8	13	15	36
	Sales mix	5	4	2
	Contritution margin ratio				30%
	Fixed Cost				250000
	Breakeven sales dollar	$378,788	$303,030	$151,515	$833,333
		(833333*5/11)	(833333*4/11)	(833333*2/11)
	Breaeven sales units	18,939	8,658	2,331	29,928
		(378788/20)	(303030/35)	(151515/65)
2	NEW MATERIAL
		Red	White	Blue	Total
	Selling price	20	35	65	120
	Variable cost	6	10	40	56
	Contribution margin	14	25	25	64
	Fixed cost				$300,000
	Contribution margin ratio				53.33%
	Breakeven sales dollar	$255,682	$204,545	$102,273	$562,500
		(562,500*5/11)	(562,500*4/11)	(562,500*2/11)
	Breakeven sales units	12,784	5,844	1,573	20,202
		(255,682/20)	(204,545/35)	(102,273/65)

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