Sale Mix and Break Even Analysis With Multiple Products

Learning Objectives:

1. Calculate break even point when a company sells more than one product.

Sale mix--Definition and Explanation of the Concept:
The term sale mix refers to the relative proportion in which a company's products are sold. The concept is to achieve the combination, that will yield the greatest amount of profits. Most companies have many products, and often these products are not equally profitable. Hence, profits will depend to some extent on the company's sales mix. Profits will be greater if high margin rather than low margin items make up a relatively large proportion of total sales. Changes in sales mix can cause interesting variation in profits. A shift in sales mix from high margin items to low margin items can cause profits to decrease even though total sales may increase. Conversely, a shift in sales mix from low margin items to high margin items can cause reverse effect-total profit may increase even though total sales decrease. It is one thing to achieve a particular sales volume; it is quite a different thing to sell most profitable mix of products.

Sales Mix and Break Even Analysis:
If a company sells multiple products, break even analysis is somewhat more complex than discussed in the topic break even point calculation. The reason is that the different products will have different selling prices, different costs, and different contribution margins. Consequently, the break even point will depend on the mix in which the various products are sold.

AB Company Product A Sales $20,000 100% Less Variable expenses 15,000 75% ----------Contribution margin Less fixed expenses Net operating income 5,000 ===== 25% ===== Product B 80,000 100% 40,000 50% ---------40,000 ===== 50% ===== 27,000 ------18,000 ===== Total 100% 55% ---45%

100,000 55,000 -----45,000

000 50% 70.45 $60.000.000 ====== Computation / Calculation of break even point: Sales Less variable expenses Fixed expenses / Overall contribution margin $27. The overall contribution margin ratio (CM ratio) has dropped from 45% to 30% and net operating income has dropped from $18. . then the break even point will also change.000 100% 60. If the sales mix changes.000 to $90.000 75% 10. Notice that this change in the sales mix has caused both the overall contribution margin and total profits to drop sharply. This is illustrated below.000 to $3.Computation / Calculation of break even point: Fixed expenses / Overall contribution margin 27. Since the company is now realizing less contribution margin per dollar of sales.000 30% 25% ====== ====== ====== ====== ====== Fixed expenses 27. The company's break even point is no longer $60. it takes more sales to cover the same amount of fixed costs.000 $60.000 50% 30.000 sales represent the break even point for the company as long as the sales mix does not changes.000 100% 20.000 Although sales have remained unchanged at $100.000 in sales per year.000 / 0. with the bulk of sales now coming from the less profitable product A.000 70% ----------------------------Contribution margin 20. the sales mix is exactly the reverse of what it was in example1.000 100% 100.000 -----Net operating income 3.000 / 0.000 10. Thus the break even point has increased from $60.3 $90.000 in sales. Example:2 AB Company Product A Product B Total 80.000.

in Celebration of Golf (ICOG).0 million.000 --------$233. Maxwell's approach seems to be working.000 1. maintenance work is done in a replica of a turn of the century club maker's shop.33% However net income for the year was actually $289.000 ====== Percent of Sales 100% 62. After attending Oklahoma State on a golf scholarship.000 --------$81.000 --------608.000--apparently because of favorable shift in sales mix toward higher margin item. Going for the Green.In Business | Benefiting from a Shift in Sales Mix: Roger Maxwell grew up near a public course where he learned the game and worked as a caddie. pp. .000 --------760.68-75.000 1. computed as follows: Sales Cost of sales Other variable expenses Contribution margin Fixed expenses Net operating income Projected $3. July 1996. A 25% increase in sales over the projections at beginning of the year resulted in a 356% increase in net income.000 ====== Percent of Sales 100% 62.000.000 370.. Maxwell invested his life savings in opening his own golf superstore. Arizona. Maxwell projected a profit of $81.000 296.33% ====== Sales Cost of Sales Other variable expenses Contribution margin Fixed expenses Net operating income Happily for Maxwell. For example. sales for the year were even better than expected--reaching $3. In the second year of operation.870.33% -------25." Maxwell has designed his store to be a museum-like Mecca for golfing fanatics.000.33% --------25. responsible for Marriot's golf courses in the United States.33% 12.000 527. They are looking for something different. the net income should have been approximately $233. Maxwell says." Inc.4 million as follows: Projected $2.000 527.33% 12..400..496. he became a golf pro and eventually rose to become vice president at Marriot. That's leverage! Source: Edward O.[p]eople are bored by malls.000 on sales of $2. in Scottsdale. Sensing an opportunity to serve a niche market. " I'd rather sacrifice profit up front for sizzle. Welles. In the absence of any other change.