Question

1 Hour JAG Radio Supply sells only two products Product X and Product Total Selling price Variable cost per unit Total fixed costs Product Product Y $25 $45 $20 $35 $350,000 Required: (a) Calculate the breakeven point in units for each of the products assuming a 2:3 sales mix. 17 points) (b) Calculate the breakeven point in units for each of the products assuming a 3:2 sales mix. (8 points (c) Assuming sales are greater than the breakeven number of units for each product, would the move from a 2:3 sales mix to a 3:2 sales mix result in an increase or decrease in operating profit? Why? (4 points)

Answer 1

	Product X	Product Y
Selling price per unit	$25	$45
Variable costs per unit	$(20)	$(35)
Contribution margin per unit	$5	$10

(a) Weighted average contribution margin per unit = (Product X contribution margin per unit * Sales mix) + (Product Y contribution margin per unit * Sales mix)

= ($5 * 2/5) + ($10 * 3/5)

= $2 + $6

= $8

Break-even point in units = Fixed costs / Weighted average contribution margin per unit

= $350,000 / $8

= 43,750 units

(b) Weighted average contribution margin per unit = (Product X contribution margin per unit * Sales mix) + (Product Y contribution margin per unit * Sales mix)

= ($5 * 3/5) + ($10 * 2/5)

= $3 + $4

= $7

Break-even point in units = Fixed costs / Weighted average contribution margin per unit

= $350,000 / $7

= 50,000 units

(c) The move from 2:3 sales mix to 3:2 sales mix result in a decrease in operating income as 6,250 (50,000-43,750) more units have to sold to brek-even and this results in decrease in profits.