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Dear Sir,
In the following question it is asked to calculate breakeven revenue(multiproduct) for the business. I have solved it correctly and got the answer but got confused with the mix ratio which is given in the question part. It says Co. makes 2 products Y and Z which it sells in the ratio 4:2 and in the bracket they have specifically mentioned that (this ratio is based on the sales revenue)usually, other BEP calculation based questions give this product sales mix ratios basis no. of units sold.
Request you to pls help me understanding what was the purpose of mentioning that whether the ratio is based on number of units sold or basis sales revenue and how does that help in the calculation.
Y —-SP 61 VC—42
Z—–SP 95 VC—63
fixed cost 200000answer–bep revenue for the business—620000
Thanks and Regards,
I assume that you have watched my free lectures on multi product CVP, in which case you will know that to get the breakeven sales revenue, we need to divide the fixed overheads by the average CS ratio.
The easiest way of calculating the average CS ratio is as follows:
For every $120 of total sales revenue (choose any number – it doesn’t have to be $120 because the end result will be the same), then 4/6 x 120 = $80 will be revenue from Y and 2/6 x 120 = $40 will be revenue from X.
If the revenue from Y is $80, then the contribution will be (61-42)/61 x 80 = $25.33.
If the revenue from Z is $40, then the contribution will be (95-63)/95 x 40 = $13.47Therefore for total revenue of $120, the total contribution will be 25.33 + 13.47 = $38.8
So the CS ratio = 38.8/120 = 0.323
So the breakeven revenue = 200,000/0.323 = $619,195. (rounds to 620,000)
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