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John Moffat.
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Syed Ahsan Ali
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What is the minimum revenue required for production to break even?
John Moffat
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It is the fixed costs divided by the CS ratio.
This is all explained in my free lectures on CVP analysis.
Syed Ahsan Ali
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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—————–$4.80
Maximum demand——————8000 units———-3000 unitsFixed 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 correct answer is A
The calculation of this question is not that simple according to my calculations below.
Total Sales revenue = (8000 x $3) + (3000 x $4.80) = $38400
Total Contribution = ($24000 x 0.3) + ($14400 x 0.5) = $14400
C/S ratio = (14400 / 38400) = $0.375minimum breakeven revenue = (9000 / 0.375) = $24000
Option D should be the answer but Option A is the correct one!
John Moffat
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You did not mention in your original post that it was a multi-product question.
Your solution is assuming that the products have to be produced in a constant ratio, but the question does not say that.
The best product to make first is the one with the highest CS ratio, which is Product Y.
However, the most we can make of Y is 3,000 units and that will give a contribution of 3,000 x 0.5 x $4.80 = $7,200.
For breakeven we need the total contribution to be $9,000 and so we need to make enough X’s so as to get an extra contribution of $1,800. So we need to make 1,800 / (0.3 x $3) = 2,000 units of X.
Therefore the minimum breakeven revenue = (2,000 x $3) + (3,000 x $4.80) = $20,400,.
Syed Ahsan Ali
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So if the production mix is constant or remain unchanged just like in the example of your notes then we assume that the actual units are produced in the same ratio as the budgeted mix.
However, if the production mix is not constant then we need to apply the Key Factor Analysis where products are made based on their contribution per sales ratio ranking to see which product needs to be produced first and then second, and so on.
Therefore, our optimal production plan is carried out based on the ranking of the products.
Secondly, breakeven questions in section C always assume constant mix or not? I am confused here!
Is the above all correct?
John Moffat
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Keeping the production mix constant means the they are produced in the same ratio as in the budget.
Key factor analysis is not relevant – we produce in the order of their CS ratios if the mix does not have to remain constant.
The example I work through in my free lectures deals with the situation when the mix remains constant and the situation when the mix does not remain constant. I do assume that you have watched the lectures and are not just using the notes.
Section C questions may assume constant mix or may not – it will be made clear in the question if they have to maintain a constant mix.
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