Question

Assume that the company sells two products, X and Y, with contribution margins per unit of $12 and $10, respectively. What happens to the break-even point if the sales mix shifts to favor product X? (In other words, sales of product X will make up a higher percentage of the sales mix.) A) Break-even point increases. B) Break-even point decreases. C) Break-even point stays the same. D) None of these answers is correct.

Answer 1

Answer:

Option B is the correct answer.

Explanation 1:

The Break-even point will decrease because higher number of contribution is earned which will cover the cost of the fixed costs or period cost of the firm. If the company has a range of products and wants to decrease the breakeven point then it will have to increase the sales of products that have greater contribution margins per unit (required that there are no limiting factors that limits the production of units).

Explanation 2:

This can also be explained from the following formula:

Breakeven point = Fixed cost / W.Avg. contribution per unit

If the Weighted average contribution per unit is greater which is only possible if the share of the a unit with greater contribution per unit increases in the existing sales mix, then the breakeven point will decrease (denominator increases then the answer would decrease-mathematics).

Hence the option B is the correct answer.