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Hello Sir,
The below question is from past question , I am not from which exam it is :
A company makes two products with the following characteristics:
Product X Product Y
Contribution to sales ratio 0.3 0.5
Selling price per unit $3.00 $4.80
Maximum demand 8,000 units 3,000 units
Fixed costs are $9,000.
What is the minimum revenue required for production to break even?
Answer – So as per my understanding the FC – 9000/ weighted C/s ratio which I calulcated as total sales – 38,400 and total contribution : 14,400 making it 0.375 right ? I suppose thats the approach towards this kind of question , and accordingly I am getting 24,000 but as per answer sheet it is 20,400? I dont know where I went wrong .. usually when 2 products are given dont we just use weighted average?The answer would be 24,000 if it was a requirement to produce the products in the same ratio as the maximum demand.
However the question as you have typed it does not state that as a requirement.
Therefore they will produce Product Y in full and get revenue of 3,000 x $4.80 = $14,400 and contribution of $7,200.
In order to breakeven they need total contribution of $9,000, so they need to earn an extra $1,800 from Product X. That will mean extra revenue of 1,800/0.3 = $6,000.
So the minimum revenue to breakeven is 14,400 + 6,000 = $20,400.
So, correct me I conclude wrong the above thing:
if the question does not state that the production is in same mix we need to produce the produce the max contribution first , and if mentioned then the way of weighted average and etc ..
I am not sure in the past I have attempted few similar questions and noted this point because I remember mostly I had done with weighted average method only.What you have written is correct.
If the question wants you to use the weighted average, then it will be made clear in the question that the same mix has to be maintained.
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