The method of calculating break-even point of a single product company has been discussed in the break-even point analysis article. In this article, I would explain the procedure of calculating break-even point of a multi product company. A multi-product company means a company that sells two or more products.
The procedure of computing break-even point of a multi product company is a little more complicated than that of a single product company.
Formula:
A multi product company can compute its break-even point using the following formula:
For computing break-even point of a company with two or more products, we must know the sales percentage of individual products in the total sales mix. This information is used in computing weighted average selling price and weighted average variable expenses.
In the above formula, the weighted average selling price is worked out as follows:
(Sale price of product A × Sales percentage of product A) + (Sale price of product B × Sale percentage of product B) + (Sale price of product C × Sales percentage of product C) + …….
and the weighted average variable expenses are worked out as follows:
(Variable expenses of product A × Sales percentage of product A) + (Variable expenses of product B × Variable expenses of product B) + (Variable expenses of product C × Sales percentage of product C) + …….
When weighted average variable expenses per unit are subtracted from the weighted average selling price per unit, we get weighted average contribution margin per unit. Therefore, the above formula can also be written as follows:
An example would be very helpful to understand the whole procedure. Consider the following example of a multi product company:
Example:
The Monster company manufactures three products – product X, product Y and product Z. The variable expenses and sales prices of all the products are given below:
Product X | Product Y | Product Z | |
Sales price per unit | $200 | $100 | $50 |
Variable cost per unit | $100 | $75 | $25 |
The total fixed expenses of the company are $50,000 per month. For the coming moth. Monster expects the sale of three products in the following ratio:
Product X: 20%;
Product Y: 30%;
Product Z: 50%
Required: Compute the break-even point of Monster company in units and dollars for the coming month.
Solution:
Monster company sells three products and is, therefore, a multi product company. Its break-even point can be computed by applying the above formula:
= $50,000 / $95* – $55**
= $50,000 / $40
= 1,250 units
*Weighted average selling price:
= ($200 × 20%) + ($100 × 30%) + ($50 × 50%)
= $40 + $30 + $25
= $95
**Weighted average variable expenses:
= ($100 × 20%) + ($75 × 30%) + ($25 × 50%)
= $20 + 22.50 + 12.50
= $55
The company will have to sell 1,250 units to break-even. Now I would compute the number of units of each product to be sold:
Products | No. of units |
Product X (1,250 × 20%) | 250 |
Product Y (1,250 × 30%) | 375 |
Product Z (1,250 × 50%) | 625 |
——— | |
Total | 1,250 |
——— |
As the number of units of each individual product to be sold have been computed, I can compute the break even point in dollars as follows:
Product X (250 units × $200) | $50,000 |
Product Y (375 units × $100) | $37,500 |
Product Z (625 units × $50) | $31,250 |
———— | |
Break-even point in dollars | $118,750 |
———— |
The break-even point of Monster company is $118,750. It can be verified by preparing a contribution margin income statement as follows:
Sales (break-even point in dollars) | $118,750 |
Less variable expenses | $68,750* |
———— | |
Contribution margin | 50,000 |
Less fixed expenses | 50,000 |
———— | |
Net operating income | 0 |
———— |
*(250 units × $100) + (375 units × $75) + (625 units × $25)
= $68,750
A D V E R T I S E M E N T S
April 22nd, 2013 at 1:46 pm
Thank you for taking the time to write this article. It describes the procedure of calculating break-even point for a company selling three products. Can I use the same procedure for any number of products? Is it also applicable to services businesses?
April 22nd, 2013 at 4:32 pm
The procedure is applicable for any number of products. Yes you can use it for service companies.
April 29th, 2013 at 6:08 pm
Hi I have 27 different items and 27 prices for each one and i am trying to make an excel break even chart can you please help…my email is nashid30@gmail.com,
thanks
November 13th, 2013 at 2:45 pm
Hi Nash,
Did you get any favorable reply from your request.
my email is dinesh@tcisb.com.my
Kind regards
Dinesh
December 24th, 2013 at 3:41 pm
Hi
First I would like to thank you for taking time to publish this article, it’s really helpful. However I have a question concerning the calculation of the breakeven for a service company (Business school) that is teaching 3 different programs, How can this method be applied?
January 25th, 2014 at 3:58 am
Please send worksheet through which I can workout break even point for company having more than 100 products.
Email me on nilima_27@yahoo.com
February 1st, 2014 at 9:26 pm
Thanks a lot for taking out time to explain this procedure, it has really helped me with my calculations. God bless you.
February 28th, 2014 at 7:12 pm
Thanks! Learned this in one go! Again God bless you.
April 12th, 2014 at 6:49 am
Thanks
I am Having a hard time for break even analysis because we are a multiprodut firm. Is there any one who has a wokksheet in which i can calculate breakeven point for company having more than 50 products?
kindly email me. naj_franz@yahoo.com Thank you very much. I will really appreciate it if somebody can help me