Question

Question 2: Surrey Builders Inc. produces three products: A, B, and C. The following information is presented for the three products: I Fixed Cost 291,600 Units produced Price Per Unit Variable Cost Per Unit Product A 80 $ 160 $ 80 Product B 120 $ 1,000 $ 600 Product c 200 $ 1,500 $ 800 Required: 1. Calculate the contribution margin for each product 2. Calculate the break-even point in units of the three products A, B, and C 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.

Contribution margin = (Selling price - Variable cost per unit) * Units

Product A = ($160 - $80) * 80

= $80 * 80

= $6,400

Product B = ($1,000 - $600) * 120

= $400 * 120

= $48,000

Product C = ($1,500 - $800) * 200

= $700 * 200

= $140,000

2.

Ratio of sales = 80 : 120 : 200

= 2 : 3 : 5

Weighted average contribution margin per unit = (Contribution margin of Product A * 0.20) + (Contribution margin of Product B * 0.30) + (Contribution margin of Product C * 0.50)

= ($80 * 0.20) + ($400 * 0.30) + ($700 * 0.50)

= $16 + $120 + $350

= $486

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

= $291,600 / $486

= 600 units

Product A = 600 units * 0.20

= 120 units

Product B = 600 units * 0.30

= 180 units

Product C = 600 units * 0.50

= 300 units

3.

Profit depends on various factors like selling price, variable cost per unit and Fixed cost.

Increase in selling price and decrease in variable cost per unit and fixed cost leads to increase the profit of the company.