# Problem-3 (Shift in sales mix, break-even analysis of a multiproduct company)

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

= \$447,200/0.52

= \$860,000

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

Required:

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.

## Solution:

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

= \$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.

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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