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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 4.8
Maximum demand 8000 3000Fixed costs are $9,000.
What is the minimum revenue required for production to break even?
A $20,400
B $25,800
C $29,400
D $24,000The answer is A in which they calculate the BEP sales separately. As it is two products, shouldn’t we use weighted average c/s ratio to calculate the BEP?
We only use the weighted average if the products have to be produced in the same ratio.
This question does not say that and so the fastest way of achieving breakeven is to produce Product Y first (because it has the highest CS ratio.
If they produce as many as possible of product Y (which is 3,000) then they will get a contribution of 3,000 x 0.5 x $4.80 = $7,200.
They need an extra $1,800 to break even, They cannot sell any more of Y, so they will sell X and they therefore need to get revenue from X of $1,800 / 0.3 = $6,000.
So the minimum revenue needed is 3,000 x $4.80 = $14,400 (from Y) plus $6,000 from X which is a total of $20,400.
(I do explain this in my free lectures on CVP analysis)
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