The Kenosha Company has three product lines of beer mugs -A, B, and C- with contribution margins

The Kenosha Company has three product lines of beer mugs -A,...

The Kenosha Company has three product lines of beer mugs $-A, B,$ and $\mathrm{C}-$ with contribution margins of $\$ 5, \$ 4,$ and $\$ 3,$ respectively. The president foresees sales of 175,000 units in the coming period, consisting of 25,000 units of $A, 100,000$ units of $B,$ and 50,000 units of $C .$ The company's fixed costs for the period are $\$ 351,000$ 1. What is the company's breakeven point in units, assuming that the given sales mix is maintained? 2. If the sales mix is maintained, what is the total contribution margin when 175,000 units are sold? What is the operating income? 3. What would operating income be if the company sold 25,000 units of $A, 75,000$ units of $B,$ and 75,000 units of $C ?$ What is the new breakeven point in units if these relationships persist in the next period? 4. Comparing the breakeven points in requirements 1 and 3 , is it always better for a company to choose the sales mix that yields the lower breakeven point? Explain.

The Kenosha Company has three product lines of beer mugs $-A, B,$ and $\mathrm{C}-$ with contribution margins of $\$ 5, \$ 4,$ and $\$ 3,$ respectively. The president foresees sales of 175,000 units in the coming period, consisting of 25,000 units of $A, 100,000$ units of $B,$ and 50,000 units of $C .$ The company's fixed costs for the period are $\$ 351,000$
1. What is the company's breakeven point in units, assuming that the given sales mix is maintained?
2. If the sales mix is maintained, what is the total contribution margin when 175,000 units are sold? What is the operating income?
3. What would operating income be if the company sold 25,000 units of $A, 75,000$ units of $B,$ and 75,000 units of $C ?$ What is the new breakeven point in units if these relationships persist in the next period?
4. Comparing the breakeven points in requirements 1 and 3 , is it always better for a company to choose the sales mix that yields the lower breakeven point? Explain.

Key Concepts

Fixed Costs

Fixed costs are expenses that do not change with the level of production or sales volume, such as rent, salaries, and utilities. They remain constant regardless of the number of units sold, making them a key factor in determining the breakeven point and overall profitability.

Operating Income

Operating income is the profit earned from a company’s core business operations after subtracting fixed costs from the total contribution margin. It assesses the efficiency of the business in generating profit from its everyday activities, prior to non-operating expenses and taxes.

Breakeven Analysis

Breakeven analysis determines the point at which total revenues equal total costs, meaning no profit and no loss. In multi-product settings, the calculation involves using the weighted-average contribution margin to determine how many units must be sold (or which mix of products must be achieved) to cover fixed costs.

Contribution Margin

The contribution margin is the difference between a product's selling price and its variable cost. It represents the amount available from each unit sold to cover fixed costs and eventually generate profit. This concept is crucial in decision-making because it highlights how each additional product sold contributes to overall profitability.

Sales Mix

Sales mix refers to the proportion of different products that a company sells relative to its total sales. This is important in multi-product CVP analysis since varying sales mixes can affect the overall profitability and breakeven point, as products often have different contribution margins.

Weighted-Average Contribution Margin

In a scenario with multiple products, the weighted-average contribution margin is calculated by taking each product's contribution margin and weighting it by its proportion in the sales mix. This aggregate measure simplifies the analysis of how changes in sales volume and mix impact overall financial performance.

Transcript

00:02 Okay, in the given question, that is, canusa company has three product lines, that is product a, b, and c, and they are planning, the expected sale is 1 ,000 units.

00:13 Out of this 1 ,175 units, product a, that is the beer mug a, will be sold 25 ,000 units.

00:20 Similarly, b, 1 ,000 and c, 50 ,000.

00:22 Also, the contribution per unit is given, that is $1 .5 for beer mug a and $1 4 for bmb and $1 3 for bmc.

00:32 If we have to find the total contribution, then what we can do is we can multiply the expected units to be sold with contribution per unit.

00:43 So, contribution will be a into b, that is 5 into 25 ,000, that is 125 ,000, and 4 into 1 ,000, that is 4 lakh, and 3 into 50, that is 150 ,000.

01:06 If we total this contribution, then we can have in this total column as 675 ,000 units.

01:16 Now, we know that if we subtract fixed cost from contribution, then we are going to get our operating income.

01:28 So, fixed contribution, the total fixed contribution has been given and that is 351 ,000.

01:35 So, 351 ,000.

01:39 If we subtract this for total contribution of 6 ,000 and 75 ,000, then we will be having 324 ,000.

01:49 This is in amount in dollar.

01:53 So this is our total operating income.

02:06 Now, the first part of the question, they are asking that if the sales mix is maintained, that is if out of 175 ,000 product a, 25 ,000 are sold and product b, that is the bmb is 1 ,000, and similarly for product is 50 ,000, then what we are going to have our breakup, break -even point in units.

02:28 So we know that if there is a portion of sales mix, in order to find the break -even point, we need two components, that is break -even point, bep is our break -even point, this will be total fixed cost total contribution so we have total fixed cost from here dollar 351 triple zero and we have our total contribution as 675 triple that gives us dollar 0 .5 2 per unit in order to find the break points in unit that is how much we need to sell product a b and c so that we are we have we will be reaching in our break even point what we will do this is the point 5 to it is the break even point for unit and if we multiply this with our sales mix that is 25 ,000 1 lakh and 50 ,000 then we are going to have our break even point so break even point for beer mug a will be how much dollar point 5 to into how many products of product a is selling 25 ,000 so 25 ,000 so now we will have 13 ,000 units of product a and for beer mark b is 0 .52 multiply with 100 ,000 and this will give us 52 ,000 and similarly for beer mark c we are going to have 0 .52 into 50 ,000 so we will have 26 if we sum up all this number of units to be sold in order to reach break -even point then we will be having 91 ,000 so 91 ,000 units are required to be sold in order to reach break -even point so this is the first part of our answer now for the second part they are asking if the sales mix is maintained, that is the unit that we are still selling, that is 25 ,000 of a, b, and c that are given.

05:49 Then what we will be having our operating income.

05:53 Now, we have already calculated this.

05:56 Like, if we maintain this sales mix of product a, b, and c, then we are going to have 6 ,000, 55 ,000 as our contribution.

06:06 And if we subtract fixed cost, if we subtract fixed cost from this, then we are going to have our operating income.

06:20 So this is the second part of our answer.

06:26 What we have, we are having total contribution as $75 ,000.

06:40 And if we subtract the fixed cost of $3 ,500 ,000, $1 ,000, then we will be getting our operating income as $3 ,000.

07:00 This is the operating income.

07:13 Now we will be solving part three...