Question

LO 3.4If the sales mix in a multi-product environment shifts to a higher volume in low contribution margin products, the break-even point will ________.
remain unchanged because all products are included in the calculation of break-even
increase because the low contribution margin products have little effect on break-even
increase because the per composite unit contribution margin will decrease
decrease because the per composite unit contribution margin will increase

Answer 1

Answer:

Option 1 is wrong because in the case of multi-product, breakeven is weighted average which means the sales price will weighted average of sale prices of all the multi-products in the sales mix. If we change the weightings the weighted average costs and selling prices changes and so the contribution changes.

Option 2 is also sligthly wrong because Contribution margin per composite unit decreases if the volume of low contribution margin products increases in the sales mix. This means:

Breakeven Point=Fixed Cost/ Contribution per unit.........equartion 1

If the contribution per unit has been decreased the breakeven will rise.

Its impact depends upon the portfolio of products company is managing. It means it increases breakeven with high effects if the products in sales mix 2 to 3.

Option 3 is 100% right because equation 1 is

Breakeven Point=Fixed Cost/ Contribution per unit

Which says

If the contribution per unit has been decreased the breakeven will rise.

Option 4 is absolutely wrong because if we shift to higher volume in low contribution margin products, Contribution margin per composite unit decreases if the volume of low contribution margin products increases

which means Weighted average contribution has been decreased and as a result breakeven point according to equation 1 has been incresed.