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Dear John,
How are you?
I hope you are safe and well,
Its written in Kaplan text study in page#146 in the middle of the page the following,
Calculation in the illustration above provide only estimated information because they assume that products X and Y are sold in a constant mix of 2X to 1Y. In reality, this constant mix is unlikely to exist and, at times, more Y may be sold than X. Such changes in the mix throughout a period, even if the overall mix for the period is 2:1 , will lead to the actual break-even point being different than anticipated.
My question is
Could you explain the following sentence, because i can not understand what is the point behind?
Even if the overall mix for the period is 2:1 , will lead to the actual break-even point being different than anticipated.
I mean why even if the overall mix for the period is 2:1, will lead to the actual break-even point being different I think by the end of the period we will get the overall budgeted mix as we had anticipated why it’s going to lead to different actual break-even point?Thank you in advance.
I am sorry but I do not have the Kaplan Study Text (only the BPP Revision Kit) and so I cannot help you with this question.
Have you watched my free lectures on multi-product CVP analysis?
Dear Sir,
I had watched your all informative lecture thank you.
Iam going wirte down the whole question to get my question.Dear John,
Company A produces product X and Y. Fixed overhead cost amount to $200,000 every year. the following budgeted information is available for both products for the next year.
products X Y
Sales price $50 $60
variable cost $30 $45
Contribution per unit $20 $15
Budgeted sales in units 20,000 units 10,000 unitsRequired;
Calculated the break-even sales?
first of all, I am going to calculate the weighted average contribution to sales ratio since the contribution per unit is different and quantities sold are different as well,
WAC/S ratio=Total contribution / Total sales
Total contribution calculation = $20*20,000 units+$15*10,000 units=$550,000
Total sales calculation =$50*20,000 units+$60*10,000 units= $1,600,000
Therefore, WAC/S ratio= $550,000/$1,600,000= 34.375%
So, breakeven sales = $200,000 fixed cost/34.375%=$5818118.1818Comment (mentioned in Kaplan text study)
Calculation in the illustration above provide only estimated information because they assume that products X and Y are sold in a constant mix of 2X to 1Y. In reality, this constant mix is unlikely to exist and, at times, more Y may be sold than X. Such changes in the mix throughout a period, even if the overall mix for the period is 2:1, will lead to the actual break even point being different than anticipated.My Question is as follow,
Why does Such changes in the mix throughout a period, even if the overall mix for the period is 2:1, will lead to the actual break even point being different than anticipated?
I mean by the end of the period i am going to reach/achieve the budgeted mix if even some changes have happened to the mix why will the actual break even different to the budgeted break even?could you explain the reason behind , please?Thank you in advance.
Firstly, even though the statement you refer to is correct (and I will explain shortly), the question as a whole is very odd because they need sales of 581,818 to breakeven but they are only budgeting on sales of 500,000 next year. That would suggest that it will take more then one year to breakeven and obviously budgeted costs etc might well be different in the following year 🙂
However, to explain the statement in a general sense: in order to breakeven they need to get a total contribution equal to the fixed costs. Suppose that keeping the mix constant for the whole period it would take them 6 months to achieve breakeven.
However, maybe if they sold a lot more of the product with the highest CS ratio (and less of the other) during the first three months then maybe they could hit a total contribution equal to the fixed costs much quicker. For the rest of the year they could change the mix so as to end up with it being in the ratio 2:1 for the year as a whole, but they will have reached breakeven sooner than if they had kept to 2:1 throughout the whole year.
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