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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 $3.00 $4.80
Maximum demand 8,000 units 3,000 unitsFixed costs are $9,000.
What is the minimum revenue required for production to break even?
Correct answer: $20,400
My answer: $24,000 (WRONG)
Hello tutor!!
I solve this question by simply calculating C/S ratio then divide $9,000 fixed cost by C/S ratio from which I got wrong answer $24,000.
They are calculating $20,400 by producing maximum demand of product Y and just 2,000 units of X.
I understand all calculations and explanations but my question is “how could we get clue where to calculate C/S ratio and where should we use this technique ?”
and one more question is that why had they use this approach to find breakeven ? Is there any clue in wording or in something else ?
Please clear my doubts!!
You are assuming that the products are produced in the same ratio, but the question does not state this.
The fastest pay of achieving break even is to produce the product with the higher CS ratio first.
Have you watched my free lectures on this?
It means if there is multi-production and no ratio is given so we should produce that product first which has higher C/S ratio.
Right ?It is not a question of whether or not they give a ratio, but whether the question tells you that they have to maintain the standard ratio or not.
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