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Hello Sir,
Ques: EC Ltd produces and sells the following two products throughout the year in a constant mix:
Product X Product Y
Variable cost per $ of sales $0.45 $0.60
Fixed costs $1,212,000 per period
The management of EC has stated that total sales revenue will reach a maximum of
$4,000,000, and is generated by the two products in the following proportions:
Product X Product Y
Variable cost per $ of sales 70% 30%
Required:
(a) Calculate the breakeven sales revenue required per period, based on the sales mix
assumed above.
As per the answer : They assumed sales to be on 100 therefore 70 and 30 was taken for product X and Y . However as per my understanding as we have given the % of VC from sales I calculated the SP as 0.64 and 2 for X and Y respectively and calculated weighted average contribution , while my answer is C/s ratio is 60% as per answer it is 50.5% ?
Can you please help me identify the area m going/understanding it wrong ?It seems that you have typed the question wrongly because you have typed the variable cost per $ of sales twice with different figures. The second one (70% 30%) cannot be the variable cost per $ of sales (because then it would have to be in $’s) and must actually be the proportions sold of each product.
By all means calculate the weighted average CS ratio, but as I explain in my lectures we weight by the sales.
The CS ratio for X is 0.55 and for Y is 0.40.
Therefore the weighted average is (0.7 x 0.55) + (0.3 x 0.40) = 0.505.
Sir I have copy pasted the question ..maybe there is an error in publication
So you have also taken VC as 0.45 and 0.6 and then sir how did you calculated Sales in it because as per my calculations 0.64 and 2 .. can you please explain how did you got CS Ratio ?
I have again watched your lecture of chapter 8 but in that its already mentioned the SP and VC and that part is clear .I am getting confused in the situation like above..
Thanks in advance John 🙂I didn’t calculate sales because it is not required.
Given that the variable cost for X is 45% of the sales, then the contribution must be 100 – 45 = 55% of the sales (which is the CS ratio). Similarly, the CS ratio for Y must be 100 – 60 = 40%.
I don’t know how you arrived at your figures, and the CS ratio could not possibly ever be 2 anyway. It would mean that the contribution was 2 times the sales price, which would be nonsense.
Okay so we assume here that the sales is 100 because ultimately here you are assuming it is 45% however as per the question 0.45 is in dollar terms.
Is this kind of tricky question should I be expecting in exams as well ?No – we don’t assume that sales are 100 at all.
Since contribution is sales less variable costs, if the variable costs are 45% of the sales then the contribution must be 55% of the sales (whatever the level of sales actually is).
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