Exercise-2 (Break-even analysis of a multiproduct company)
PQR company sells two products – product A and product B. The total fixed expenses of the company are $1,197,000. The monthly data of PQR is as follows:
Product A:
- Sales: $1,400,000
- Contribution margin ratio: 60%
Product B:
- Sales: $600,000
- Contribution margin ratio: 70%
Required:
- Prepare contribution margin income statement for the company.
- Calculate break-even point in dollars.
Solution:
(1) Income statement:
(2) Computation of break-even point:
The PQR company sells two products. Its break-even point can be easily computed by dividing the total fixed expenses by overall contribution margin ratio (CM ratio).
Fixed expenses/Overall CM ratio
= 1,197,000/.63
= $1,900,000
Can I have the full calculation of 37%
@Phillipa
(740,000/2000,000)*100 = 37% or 0.37
the break even point $1,900,000 can not cover the fixed expenses after deducted by variable expenses $740,000, why?
variable costs won’t stay equal to 740000 if the sales changed since they are variable , first we were selling 2000000 dollars and we had 740000 dollars variable costs for this level of sales , but when we break-even we sell only 1900 000 so automatically variable costs will decrease . Hope i helped 🙂
It should cover the variable expenses at break-even point
BEP = VE + FE
1,900,000 = 703,000* + 1,197,000
*1,900,000(.37)
Why are the sales doubled in the income statement?
From $700,0000 in the introduction
To $1,400,000 in the income statement
And the same for product B
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