The Modern Digital World company sells three products – wireless keyboards, wireless mouses and wireless headphones. All the products are compatible with general laptop and desktop computers.

The budgeted contribution margin income statement of the Modern Digital World for a month is given below:

Wireless
keyboards
Wireless
mouses
Wireless
headphones
Total
Sales $480,000 100% $200,000 100% $320,000 100% $1,000,000 100%
Less variable expenses 144,000 30% 160,000 80% 176,000 55% 480,000 48%
 ——–  —– ——– —– ——– —–  ——– —–
Contribution margin $336,000 70%  $40,000 20%  $144,000  %45 520,000 52%
 ——–  —– ——–  —– ——–  —–  —–
Less fixed expenses  447,200
 ——–
Net operating income 72,800
——–

Budgeted break-even point:

Fixed expenses / CM ratio = 447,200 / 0.52 = $860,000

The actual sales data for the month is given below:

Wireless keyboards Wireless mouses Wireless headphones Total
$320,000 $400,000 $280,000 $1,000,000

Required:

Compute the breakeven point of Modern Digital World company based on the actual sales. Explain the reason of difference (if any) between the break-even point computed on the basis of budgeted sale and the break-even point computed on the basis of actual sales data.

Solution:

Before computing break-even point based on the actual sales, we need to prepare an income statement based on the actual sales.

Wireless
keyboards
Wireless
mouses
Wireless
headphones
Total
Sales $320,000 100% $400,000 100% 280,000 100% 1,000,000 100%
Less variable expenses 96,000 30% 320,000 80% 154,000 55% 570,000 57%
——– —– ——– —– ——– —– ——– —–
Contribution margin  $224,000 70%  $80,000 20% $126,000 %45  430,000 43%
——– —– ——– —– ——– —– —–
Less fixed expenses  447,200
 ——–
Net operating loss (17,200)
——–

Break-even point:

Fixed expenses / CM ratio

447,200 / 0.43

$1,040,000

The reason of difference in break-even point in dollar sales:

The difference in break-even point is because of shift in sales mix.

Percentage of total sales (Budgeted) Percentage of total sales (Actual)
Wireless keyboards 480,000 /1,000,000 = 0.48 or 48% 320,000 /1,000,000 = 0.32 or 32%
Wireless mouse 200,000 /1,000,000 = 0.20 or 20% 400,000 /1,000,000 = 0.40 or 40%
Wireless headphones 320,000 /1,000,000 = 0.32 or 32% 280,000 /1,000,000 = 0.28 or 28%

A shift in sales mix from the products generating high contribution margin to the products generating low contribution margin decreased the overall contribution margin ratio of the company from 52% to 43% and increased the dollar sales required to break-even from $860,000 to $1,040,000.

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