Managerial Accounting
Managerial Accounting
14th Edition
ISBN: 9781337270595
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
Question
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Chapter 5, Problem 5PB

1.

To determine

Calculate the break-even point in sales units for the overall Product E for the current year.

1.

Expert Solution
Check Mark

Explanation of Solution

Sales mix: It refers to the relative distribution of the total sales among the number of products sold by a company. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

Determine the break-even point in sales units for the overall Product E.

Fixed cost =$46,800

Contribution margin per unit =$10.40 per unit (3)

Break-evenpointinSales(units)forProductE] =FixedCostsContributionMarginperunit=$46,800$10.40=4,500units

Working note (1):

Note: For break-even analysis, the Product-12” Pizza and Product-13” Pizza are considered as the components of one overall company’s Product E.

Determine the selling price per unit of Product E.

SellingpriceperunitofProductE]=(Sellingpriceperunitof12"Pizza×salesmixof12"Pizza)+(Sellingpriceperunitof16"Pizza×salesmixof16"Pizza)=($12perunit×30%)+($15perunit×70%)=$3.60perunit+$10.50perunit=$14.10perunit

Working note (2):

Determine the variable cost per unit of Product E.

VariablecostperunitofProductE]=(Variablecostperunitof12"Pizza×salesmixof12"Pizza)+(Variablecostperunitof16"Pizza×salesmixof16"Pizza)=($3perunit×30%)+($4perunit×70%)=$0.90perunit+$2.80perunit=$3.70perunit

Working note (3):

Determine the unit contribution margin of Product E.

UnitContributionMarginofProductE]=(Sellingpriceperunit)(Variablecostperunit)=$14.10perunit(1)$3.70perunit(2)=$10.40perunit

Conclusion

Therefore, the break-even point in sales units for the overall Product E for the current year is 4,500 units.

2.

To determine

Calculate the break-even sales (units) for Product-12” Pizza and Product-16” Pizza.

2.

Expert Solution
Check Mark

Explanation of Solution

Determine the break-even point in sales units:

For Product-12” Pizza

Break-even point in sales units for Product E =4,500 units (refer Part a)

Sales Mix for Product Laptops =30%

Break-evenpointinSales(units)forProduct12"Pizza] =(Break-evenpointinSales(units)forProductE)×(SalesmixforProduct12"Pizza)=4,500units×30%=1,350units

For Product-16” Pizza

Break-even point in sales units for Product E =4,500 units (refer Part a)

Sales Mix for Product Tablets =70%

Break-evenpointinSales(units)forProduct16"Pizza] =(Break-evenpointinSales(units)forProductE)×(SalesmixforProduct16"Pizza)=4,500units×70%=3,150units

Conclusion

Therefore, the break-even point in sales units for the Product 12” Pizza is 1,350 units and for the Product 16” Pizza is 3,150 units.

3.

To determine

Compare the break-even point with that in Part (1).

3.

Expert Solution
Check Mark

Explanation of Solution

The break-even point calculated in (1) with a sales mix of 50% 12” Pizza and 50% 16” Pizza is 4,680 units. It is more than the break-even point of 4,500 units calculated in Part 1.

The reason for the difference is the sales mix which is allocated at a lower percentage to the 12” Pizza (50%) and 16” Pizza (50%) in the present case. It resulted in the lower contribution margin per unit of $10.00 per unit than in Part 1 ($10.40 per unit). Thus, it increases the break-even point of sales (units) in the present case.

Working note (4):

Determine the break-even point in sales units for the overall Product E.

Fixed cost =$46,800

Contribution margin per unit =$10.00 per unit (7)

  Break-evenpointinSales(units)forProductE] =FixedCostsContributionMarginperunit=$46,800$10.00=4,680units

Note: For break-even analysis, the Product-12” Pizza and Product-16” Pizza are considered as the components of one overall company’s Product E.

Working note (5):

Determine the selling price per unit of Product E.

SellingpriceperunitofProductE]=(Sellingpriceperunitof12"Pizza×salesmixof12"Pizza)+(Sellingpriceperunitof16"Pizza×salesmixof16"Pizza)=($12perunit×50%)+($15perunit×50%)=$6perunit+$7.50perunit=$13.50perunit

Working note (6):

Determine the variable cost per unit of Product E.

VariablecostperunitofProductE]=(Variablecostperunitof12"Pizza×salesmixof12"Pizza)+(Variablecostperunitof16"Pizza×salesmixof16"Pizza)=($3perunit×50%)+($4perunit×50%)=$1.50perunit+$2perunit=$3.50perunit

Working note (7):

Determine the unit contribution margin of Product E.

  UnitContributionMarginofProductE]=(Sellingpriceperunit)(Variablecostperunit)=$13.50perunit(5)$3.50perunit(6)=$10.00perunit

Working note (8):

Determine the break-even point in sales units:

For Product-12” Pizza

Break-even point in sales units for Product E =4,680 units (4)

Sales Mix for Product 12” Pizza =50%

  Break-evenpointinSales(units)forProduct12"Pizza] =(Break-evenpointinSales(units)forProductE)×(SalesmixforProduct12"Pizza)=4,680units×50%=2,340units

Working note (9):

For Product-16” Pizza

Break-even point in sales units for Product E =4,680 units (4)

Sales Mix for Product 16” Pizza =50%

Break-evenpointinSales(units)forProduct16"Pizza] =(Break-evenpointinSales(units)forProductE)×(SalesmixforProduct16"Pizza)=4,680units×50%=2,340units

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Managerial Accounting

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