The Digital World company sells three products – Product A, Product B and Product C. The budgeted contribution margin income statement of the company for the coming month is given below:
Budgeted break-even point = Fixed expenses/CM ratio
The actual sales data for the month is given below:
- Product A: $320,000
- Product B: $400,000
- Product C: $280,000
- Total: $320,000 + $400,000 + $280,000 = $1,000,000
Compute the break-even point of 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 sales and the break-even point computed on the basis of actual sales data.
Before computing break-even point based on the actual sales, we need to prepare an income statement based on the actual sales.
Actual break-even point = Fixed expenses/CM ratio
The reason of difference in break-even point in dollar sales:
The difference in break-even point is because of shift in sales mix.
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.