Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. Required 1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product. 2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product. (Round to the next whole unit.) Analysis Component 3. What insight does this analysis offer management for long-term planning?
Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling
prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture
and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected
in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material
has been used to manufacture products 1 and 2. The company has developed a new material of equal
quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10
and product 2 by $5. However, the new material requires new equipment, which will increase annual
fixed costs by $50,000.
Required
1. If the company continues to use the old material, determine its break-even point in both sales units and
sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales
dollars of each individual product. (Round to the next whole unit.)
Analysis Component
3. What insight does this analysis offer management for long-term planning?
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