Product Re: DQ-WK4
by Aju Binoy Kuttiyil – Thursday, March 24, 2022, 12:01 AM
If you have a business that sells both products and services, it is more difficult to perform a break-even analysis because no two items or services are priced or have the same prices. The profit margins for various products vary widely. Each company’s break-even point is determined by its product mix. Product mix shifts the break-even point for a business Increasing demand for low-margin products causes the break-even point to rising (Kampf et al., 2016). High-margin products purchased by customers reduce the break-even point. Break-even points might shift depending on the sales mix even if total sales data remain stable (as they often do). Various items’ break-even analyses are demonstrated in the following example.
Product Multiple In CVP analysis, a company’s sales mix is seen as the sum of the individual goods that make up the company’s overall sales mix. The break-even point is estimated using a composite unit that isn’t sold to customers but instead generates a combined contribution margin. CVP analysis uses composite units. When determining the break-even threshold, we take into account the contribution margins of each component (Fuksa, 2021). The fixed costs are divided up between the various components of this composite unit. If a product is eliminated from the overall mix of units or sales, the fixed costs must be redistributed (Osaremen, 2019).
We can analyze the many fruits in the fruit basket, such as apples, oranges, bananas, and pears, as an example. Each fruit’s purchase price and production cost are readily apparent. Each sort of fruit contributes a different percentage of the total. To put it another way, how can we figure out how much of our fruit basket is worth in total?
One pear and five apples each will go into each of our woven baskets. In the image, our product mix is shown as a 5:3:2:1 ratio. (Figure).
by Athul Philip – Thursday, March 24, 2022, 9:40 PM
Module 4 DQ
Having precise information about a company’s break-even point is essential to determining its overall profitability. When starting a new business, you need to ensure that your sales will be enough to pay your costs and keep your firm from going bankrupt. At the break-even sales level, a corporation does not make a profit or suffer a loss, according to the textbook definition (Wild and Shaw, 2018). In order to receive the appropriate information, a firm must have precise data of its fixed expenses, sales, and variable costs. It is critical for a business to know whether it is losing money or generating money on every level, from investors wanting to invest, to board members and managers controlling expenses, to people getting wages or not.
The break-even point enables firms to plan ahead, make essential expenditures, and identify where areas to minimise expenses in order to achieve profitability.
Using Pego as an example, the company sells children’s toys for $100 each and has variable expenses of $50 per unit sold in its business. It has a monthly cost of $20,000 in fixed expenses.
Once the contribution margin per unit is determined, we can use that number to calculate how many units are needed to break even. For example, the contribution margin per unit is (sales – variable expenses) = $50.
Achieving break-even means selling 400 units each month, which is equal to $20,000 in fixed costs and $50 in contribution margin. Fixed costs/Contribution margin ratio = $20,000/50 percent = $20,000/0.5 = $40,000 of monthly sales to break even in dollars per month.
Meaning that if Pego sells 400 pieces or $40,000 worth of merchandise, it will earn a loss of $0. Profit will rise or fall $50 for every additional or less units sold. As a result, Pego has a sales goal it must meet in order to run and function properly without incurring any losses.
Wild, J. J., Shaw, K. W., & Chiappetta, B. (2018). Financial and managerial accounting information for decisions. McGraw Hill Education.