Question

Breakeven analysis; multiproduct CVP analysis Herzog Industries sells two electrical components with the following characteristics. Fixed costs for the company are $200,000 per year.

	XL-709	CD-918
Sales price	$15.00	$38.00
Variable cost	10.00	24.00
Sales volume	30,000 units	75,000 units

Required

1. How many units of each product must Herzog Industries sell in order to break even?
2. Herzog’s vice president of sales has determined that due to market changes, the sales price of component XL-709 can be increased to $25.00 with no impact on sales volume. What will be Herzog’s new breakeven point in units?
3. Returning to the original information, Herzog’s vice president of marketing believes that spending $58,500 on a new advertising campaign will increase sales of component CD-918 to 90,000 units without affecting the sales of product XL-709. How many units of each product must Herzog sell to break even under this new scenario?
4. The market changes referred to in part (b) indicate additional overall demand for component XL-709. Herzog’s vice president of marketing believes that if the company spends $58,500 to advertise component XL-709 rather than CD-918, as planned in part (c), the company will be able to sell a total of 50,000 units of XL-709 at the new price of $25.00. If the company must choose to advertise only one component, which component should receive the additional $58,500 in advertising?

Answer 1

1) Breakeven point refers to the point of sales where there is no profit and no loss. In other words, it occurs when the revenue is equal to the quantum of variable and fixed cost.

Breakeven point = Fixed Costs/Contribution Margin

Calculation of break even point

Particulars	XL-709	CD-918
(A) Sales Price pr unit	15	38
(B) Variable Costs per unit	10	24
(C) Contribution per unit i.e contribution margin [ A-B ]	5	14
(D) Fixed Costs	200,000	200,000
(E) Breakeven Point [ D/C ] in terms of number of units	40,000	14,286

The answer has been calculated by assuming that there is only one product produced at a point of time, since the bifurcation of fixed costs among the products is not given.

2) Calculation of break even point if Sales price of XL-709 is increased to $25.

Particulars	XL-709
(A) Sales Price pr unit	25
(B) Variable Costs per unit	10
(C) Contribution per unit i.e contribution margin [ A-B ]	15
(D) Fixed Costs	200,000
(E) Breakeven Point [ D/C ] in terms of number of units	13,333

Again, the answer has been calculated by assuming that there is only one product produced at a point of time, since the bifurcation of fixed costs among the products is not given.

3) If the company chooses to opt to take on the advertisement campaign, it would result in additional fixed costs of $58,500. Therefore the total fixed costs would be $258,500 (200,000+58,500).

Calculation of break even point

Particulars	XL-709	CD-918
(A) Sales Price pr unit	15	38
(B) Variable Costs per unit	10	24
(C) Contribution per unit i.e contribution margin [ A-B ]	5	14
(D) Fixed Costs	258,500	258,500
(E) Breakeven Point [ D/C ] in terms of number of units	51,700	18,464

Again, the answer has been calculated by assuming that there is only one product produced at a point of time, since the bifurcation of fixed costs among the products is not given.

4) Decision making relating to which product shall be advertised

	Particulars	If XL-709 is advertised		If CD-918 is advertised
		XL-709	CD-918	XL-709	CD-918
	Selling price per unit	25	38	25	38
Less:	Variable cost per unit	10	24	10	24
	Contribution per unit	15	14	10	14
	Total Number of Units	50,000	75,000	30,000	90,000
	Gross Contribution	750,000	1,050,000	300,000	1,260,000
	Total Contribution	1,800,000		1,560,000

As shown in the calculation, the total contribution earned by Herzog Industries would be more if XL-709 is advertised instead of CD-918, as it would provide bigger margin to cover the fixed costs and additional profits. The fixed costs would remain the same in either case, therefore they have not been considered for decision making.

Therefore, Herzog Industries should provide additional funds of $58,500 for advertising XL-709.