Ingrum Corporation produces and sells two products. In the most recent month, Product R38T had sales of $20,000 and variable expenses of $7,400. Product X08S had sales of $39,000 and variable expenses of $6,170. The fixed expenses of the entire company were $41,160.If the sales mix were to shift toward Product R38T with total sales remaining constant, the overall break-even point for the entire company:
A) would not change.
B) would increase.
C) would decrease.
D) could increase or decrease.

Question

Quizplus · Accepted Answer

To calculate the overall break-even point for the entire company, we need to know the weighted average contribution margin per unit of both products.

For Product R38T, the contribution margin per unit is sales price ($20,000) minus variable expenses ($7,400), which equals $12,600.

For Product X08S, the contribution margin per unit is sales price ($39,000) minus variable expenses ($6,170), which equals $32,830.

The weighted average contribution margin per unit is calculated by multiplying the contribution margin per unit of each product by its proportional sales mix and then adding them together. Assuming that the sales mix remains constant, the weighted average contribution margin per unit for the two products is:

($12,600 × sales mix of R38T) + ($32,830 × sales mix of X08S) = ($12,600 × 0.338) + ($32,830 × 0.662) = $26,749.80

The overall break-even point for the entire company is the total fixed expenses divided by the weighted average contribution margin per unit. Using the original sales mix, the break-even point is:

$41,160 ÷ $26,749.80 = 1,542.77 units

Now, if the sales mix were to shift toward Product R38T with total sales remaining constant, the break-even point would increase because the contribution margin per unit of Product R38T is lower than that of Product X08S. This means that more units of Product R38T would need to be sold to cover the same amount of fixed expenses. Therefore, the correct answer is B) would increase.

Ingrum Corporation Produces and Sells Two Products