Question

Question 2: Hindi Builders Inc. produces three products: A, B, and C. The following information is presented for the three products: Fixed Cost Units produced Price Per Unit Variable Cost Per Unit Product A 80 $ 320 $ 160 Products 120 $ 1,800 $ 800 Productc 200 $ 2,800 $ 1,500 Required: 1. Calculate the contribution margin for each product 2. Calculate the break-even point in units of the three products A, B, and combination based on the sales mix percentage 3. Please give suggestions to the decision makers about how to increase profit based on the CVP analysis.

Answer 1

1.

	Product A	Product B	Product C
Price per unit	$320.00	$1,800.00	$2,800.00
Variable Cost per unit	$160.00	$800.00	$1,500.00
Contribution per unit	$160.00	$1,000.00	$1,300.00

2. **Assumption-Since the fixed cost given in the question is not visible hence we have solved the question assuming it to be $800,000

Step 1: Contribution margin per unit

	Product A	Product B	Product C
Price per unit	$320.00	$1,800.00	$2,800.00
Variable Cost per unit	$160.00	$800.00	$1,500.00
Contribution per unit	$160.00	$1,000.00	$1,300.00

Step 2: Weighted-average contribution margin per unit for the sales mix

Product A contribution margin per Unit × Product A Sales Mix Percentage
+ Product B contribution margin per Unit × Product B Sales Mix Percentage
+ Product C contribution margin per Unit × Product C Sales Mix Percentage
= Weighted Average Unit Contribution Margin

Sales mix % = Product Units/Total Units

A = 80/400 = 20%

B = 120/400 = 30%

C = 200/400 = 50%

	Product A	Product B	Product C
Price per unit	$320.00	$1,800.00	$2,800.00
Variable Cost per unit	$160.00	$800.00	$1,500.00
Contribution per unit	$160.00	$1,000.00	$1,300.00
Sales Mix %	20%	30%	50%
	$32.00	$300.00	$650.00
Weighted Average CM per unit	$982.00

Step 3: Total units of sales mix required to break-even

Break Even = Total Fixed Cost / Weighted Average CM per unit

= 800000/982

= 814.66 (The answer will suitably change when given fixed cost in the question will be used)

3. The CVP analysis yields 814.66 units to be at breakeven (see above assumption). Before break even the company incurs a loss and at break even there is no loss or gain. After break even the company starts to earn profits. Since the company is currently producing a total of 400 units hence it is in the loss phase. In order to maximize profits the company should produce more than 814.66 units.

Also for earning a given level of profits the formula is (Fixed cost + Desired profts) / Weighted Average Contribution Margin per unit

Suppose the company wants to earn a profit of $400,000 the number of units required to be produced will be

= (800000+400000)/982

= 1221.996 or 1222 approx. (This will suitably change when given fixed cost in the question will be used)