Mount Carmel Company sells only two products, Product A and Product B. Product A

Question

Mount Carmel Company sells only two products, Product A and Product B.

Product A

Product B

Total

Selling price                       $600,000                $1,000,000                  1,600,000

Variable cost per unit         360,000                     500,000                           860,000

Contribution Margin           240,000                       500,000                      740,000

Fixed cost                                                                                                   555,000

Operating income                                                                                         $185,000

A. Determine the overall break-even point for the company in total sales dollars. Do not round numbers. Show your work.

B. What is the amount of sales for each product at the break-even point?

C. If the sales mix shifts toward Product A with no change in total sales, what will happen to the break-even point for the company? Explain.

Product A

Product B

Total

Explanation / Answer

A) The break-even point in sales dollars can be calculated by dividing a company's fixed expenses by the company's contribution margin ratio.

The contribution margin is sales minus variable expenses. When the contribution margin is expressed as a percentage of sales it is referred to as the contribution margin ratio. (When we use the term "fixed expenses" we mean the company's total amount of fixed costs plus its fixed expenses. When we say "variable expenses" we mean the total of the company's variable costs plus its variable expenses.)

Let's Calculate the break-even point in sales dollars with the following information. The company has fixed expenses of $555,000 per year. Its variable expenses are approximately 53.75% of sales. This means that the contribution margin ratio is 46.25%. (Sales minus the variable expenses of 53.75% of sales leaves a remainder of 46.25% of sales. The fixed expenses of $100,000 divided by the contribution margin ratio of 46.25% equals $1,200,000. This tells you that if the company has sales of approximately $1,200,000 it will be at the break-even point—the point where sales will be equal to all of the company's expenses.

notes: sales, 1,600,000 = 100%

variable cost, 860,000 = ?

=860,000 * 100 / 1,600,000 = 53.75% variable portion on sales

bal i.e, contribution ratio = sales -variable portion = 100- 53.75 = 46.25%

now, Break even point = fixed cost / contribution ratio

= 555,000 / 46.25%

BEP =1,200,000

B. The amount of sales for each product at the break-even point,

for product A 450,000 and for product B 750,000 this is calculated based on their sales ratio that is 600,000 and 1,000,000 that comes to 6:10 ratio

C. If the sales mix shifts toward Product A with no change in total sales, what will happen to the break-even point for the company.

this sentance define that if the total sales shifts to product A what happenes to break even point.

let us see what happenes:

Product A Sales =1,200,000

less; varible cost = 720,000 ( 60% on sales)

contribution = 480,000

less: fixed cost = 555,000

Operationg loss = (75,000)

here the company incurres losses.

now we will calculate the break even for this,

Breakeven point = Fixed cost / contribution portion

= 555,000 / 40%

BEP = $1387,500

notes: sales, 600,000 = 100%

variable cost, 360,000 = ?

=360,000 * 100 / 600,000 = 60% variable portion on sales

bal i.e, contribution ratio = sales -variable portion = 100 - 60 = 40%

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