Sales mix and break-even point analysis

Explanation of the sales mix:

The proportion in which a multi-product company sells its products is referred to as sales mix. Companies involved in selling two or more products try to sell their products in a proportion or mix that maximizes their total profit.

A business with low sales volume may earn more profit than a business with high sales volume if it has a large proportion of high margin products in its sales mix.

A business is not always free to sell any number of units of  a product that generates the highest margin for the company. Because the sale depends on a number of external factors such as user’s demand for the product, supply of raw materials, company’s production capacity, restrictions imposed by government etc. Since sale depends on some uncontrollable factors, the ultimate purpose of the companies is to find a sales mix that will generate the highest profit for them.

Shift in sales mix and break-even point:

Usually, different products have different sales prices, variable expenses and contribution margin. Therefore, any change in proportion in which the products are sold has significant impact on the break-even point. This change is known as ‘change in sales mix’ or ‘shift in sales mix’. For better explanation, consider the following example:

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Example:

The NORAN company sells two products; product X and product Y. The information about sales price, variable expenses per unit and total fixed expenses is given below:

The total monthly fixed expenses of the company are \$270,000. The  company wants to generate a sales revenue of \$1,000,000 in the next month. To obtain this goal the company has the following options:

(a). Sell 6,000 units of product X and 7,000 units of product Y.
(b). Sell 14,000 units of product X and 3,000 units of product Y.

Required:

1. Prepare contribution margin income statement and calculate break-even point if NORAN decides to select option (a).
2. Prepare contribution margin income statement and calculate break-even point if NORAN decides to select option (b).
3. Whichever is the better option, (a) or (b)?
4. Explain the reason of change in break-even point in dollars (if any).

Solution:

(1). If option (a) is selected:

Break-even point = Total fixed expenses / Overall contribution margin ratio
= \$270,000/.54*
= \$500,000

*540,000/1,000,000

(2). If option (ii) is selected:

Break-even point = Total fixed expenses / Overall contribution margin ratio
= \$270,000/.46*
= \$586,957

*460,000/1,000,000

(3) The better option:

Option (a) is better than option (b) because it generates more net operating income.

(4). The reason of change in break-even point:

A change in sales mix usually have a strong effect on the break-even point. The break-even point has increased from \$500,000 to \$586,957 because the shift in sales mix from high margin product (product Y) to low margin product (product X) has dropped the overall contribution margin ratio from 0.54 to 0.46.

A shift in sales mix from high contribution margin product to low contribution margin product increases the dollar sales required to break-even while a shift from low contribution margin product to high contribution margin product reduces the dollar sales required to break-even.

More from Cost volume and profit relationships (explanations):
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9 Comments on Sales mix and break-even point analysis
1. niyi awotomilusi

Please I need materials to guide me in writing a paper on Relevance of multi -products analysis in a soft drink industry: a case study of coca cola company.

2. Hi Accounting Management. This article really helpful. But my super shop company/ Departmental store which has more than 1500 products, How can i workout break even point? Please send me worksheet on email.

3. I find it very handy, coz it helps me in my studies for accounting…Unitech PNG..

4. Tegegne Alemie

I have question please solve and send to me in my adress

5. how so amazing I love to see more concise note

6. Michael Osei-Kesse

Please check the contribution margin ratio calculation for the second case. I think it should be 460,000/1,000,000 = 0.46. I think it was a typo from your end. Thank you. Great stuff and good job.

1. Accounting For Management

Corrected. Thank you for pointing out.

7. Aksa Ali

Hi can you tell me what are the impacts of a decrease in sales on the break even point.