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Beauty Co makes two products, nail polish and lipsticks. Nail polish sales make up 30% of total sales and their variable costs are 45% as a percentage of sales value.
Lipsticks sales are 70% of the total sales and their variable costs are 40% as a percentage of sales value.
Total fixed costs are $400,000 for the company.Required:
What is the break-even level of sales revenues for the company?I’m really at a loss as to how I should approach this question. Can you please give me some guidance?
I think the easiest way is as follows.
Suppose that the total sales were $100.
Then nail polish sales will be $30, and var costs will be 45% x $30 = $13.5
So the contribution will be 30 – 13.5 = $16.50.Lipstick sales will be $70, and var costs will be 40% x 70 = $28
So the contribution will be 70 – 28 = $42So……for total sales of $100, the total contribution will be 16.50 + 42 = $58.50
Which means that the CS ratio is 58.50 / 100 = 0.585 (or 58.5%)
Assuming they keep selling in the same ratio, the break-even sales will be fixed costs / CS ratio = 400,000 / 0.585 = $683,761 🙂
Hope that all makes sense 🙂
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