Chapter 6, Problem 9Q

Explain how a shift in the sales mix could result in both a higher break-even point and a lower net operating income.

To determine

Sales mix: A proportion of two or more products sold by the company to maximize their profits.

: The impact of shift in the sales mix on the break-even point and net operating income.

Answer to Problem 9Q

Solution: When there is a change in the sales mix of the company, ultimately the break-even point and net operating income changes. If the change in the sales mix causes an increase of overall variable expenses, the break-even point will increase and the net operating income will decrease. If the change in the sales mix causes a decrease of overall variable expenses, the break-even point will decrease and the net operating income will increase.

Explanation of Solution

: A sales mix combination of two or more product being sold by a firm. Due to changes in the sales mix, if the product with the high variable expenses is sold more during the period, this will result in an increase of overall variable expenses and decrease of contribution margin ratio. The following example shows the impact of shift in sales mix on the break-even point and net operating income.

For example: ABC company sells two products: X and Y. The information regarding sales price, variable expenses per unit and total fixed expenses is given below:

	Product X	Product Y
Selling price	$10	$20
Variable expenses	$7	$10

The monthly fixed expenses of the company is $10,000.

1. Calculate the net operating income at sales volume of 2,000 units of product X and 1,000 units of product Y.

2. Determine the changes in the break-even point and net operating income at sales volume of product X 1,000 units and product Y 2,000 units.

1.

	Product X		Product Y		Total
Sales units	1,000		2,000		3,000
Sales revenue	$10,000	100%	$40,000	100%	$50,000	100%
Variable expenses	$7,000	70%	$20,000	50%	$27,000	54%
Contribution margin	$3,000	30%	$20,000	50%	$23,000	46%
Fixed expenses					$10,000
Net operating income					$13,000

  $$

  $\begin{array}{l}\begin{array}{l}Break-evenpointindollarsales=\frac{Fixedexpenses}{Contributionmarginratio}\hfill \\ =\frac{\$10,000}{0.46}\hfill \end{array} \\ =\$21,739\end{array}$

2.

	Product X		Product Y		Total
Sales units	2,000		1,000		3,000
		Percent		Percent		Percent
Sales revenue	$20,000	100%	$20,000	100%	$40,000	100%
Variable expenses	$14,000	70%	$10,000	50%	$24,000	60%
Contribution margin	$6,000	30%	$10,000	50%	$16,000	40%
Fixed expenses					$10,000
Net operating income					$6,000

  $\begin{array}{l}\begin{array}{l}Break-evenpointindollarsales=\frac{Fixedexpenses}{Contributionmarginratio}\hfill \\ =\frac{\$10,000}{0.40}\hfill \end{array} \\ =\$25,000\end{array}$ As the result of shift in sales mix, the break-even point increases by $3,261 and the net operating income reduces by $7,000.

Given: A shift in the sales mix could result in both a higher break-even point and lower net operating income.

Conclusion

: It is concluded that, the increase in the overall variable expenses of the company results in an increase of the break-even point and decrease of the net operating income. A variable expense always changes according to the changes in the sales and if a company sells more units of product with high variable expenses, it consequently leads to an increase of overall variable expenses. This in turn reduces the profit of the company.