![]() ![]() Keep the contribution margin, manufacturing space and labor in mind as you work through this process.Break-even analysis is important because calculating your business’s break-even point allows you to determine how much more revenue your business needs to generate before you can reach profitability. As a manager, you may be asked to determine a product mix that is profitable for your company. We are still making the exact same number of products, but due to the contribution margin being lower on product #3, we are now showing a net loss rather than a profit!Ĭompanies make these kinds of decisions on a daily basis. So, if we shift our production to making more of product #3 Variable costs remain the same per item, regardless of quantity.We have production space and labor for 2750 products total.Let’s take a look at what happens if our sales mix shifts. Now, let’s also assume that this mix uses all of the manufacturing space, all of the time!! What happens if we suddenly have a huge demand for product #3, the one contributing the least to the contribution margin? We look at reallocating space to produce more of product #3, but that means we need to produce less of products #1 and #2 that contribute more to our contribution margin So, let’s look at the current sales mix, contribution margins and fixed costs. ![]() Product 3 contributes $5 to cover fixed expenses per item sold.Product 2 contributes $8 to cover fixed expenses per item sold.Product 1 contributes $20 to cover fixed expenses per item sold. ![]() Note the difference in contribution margin for each product. Product 3: Sells for $20 with variable costs of $15 each.Product 2: Sells for $10 with variable costs of $2 each.Product 1: Sells for $40 with variable costs of $20 each.Let’s say your company makes three products: How do we go about figuring the break even point when we decide to adjust our sales mix? This is a complex question.Īfter watching the video, take a look at an additional example, with three products in the mix. What if your company sells more than one product (which most companies do!). Practice Questions Break-Even Point and Sales Mix With the previous information you can then figure out, the dollar sales needed to break even: Remember the formula method is simply a shortened version of the equation method, so both ways should come to the same conclusion. The equation method or the formula method can be used with the same result. Minnesota Kayak Company needs to sell 28 kayaks in our example to break even. ![]() Once the basic data is calculated, it can offer a great deal of insight and help in planning. This is one of the key uses of the CVP analysis. Target profit analysis helps us to know how much in dollar sales a company will need to reach a certain profit point. You have been tasked with figuring out how many kayaks need to be sold in order to get the investors their return! They have talked with your supervisor, and between them all, would like to get $30,000 a month in profit to divide between them. Minnesota Kayak has a few investors who are interested in getting a return on their investment. Practice Questions Target Profit Analysis These are some pricy kayaks and they want to insure that the use of their manufacturing facility will make sense for this new line. The Minnesota Kayak Company has come to you to help them determine the break even point on a new line of racing kayaks they plan to introduce to the market. Whether we are talking about apples, widgets or kayaks, the process is the same. We will discuss both methods in detail, but let’s start with a new company and a new product! The widgets are starting to get boring. There are two methods we can use to figure out our break even point: This is the point where selling one less item would create a loss and selling one more item would create a profit situation. So essentially, you are not making money, but you are not losing money either. The break even point can be defined as the exact point where sales-expenses = zero. How many apples does Farmer Joe need to sell to break even?
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