Operating and

financial leverage
Sales Mix
Objective:
• Solve the breakeven point in a multi-product setting
Sample problem
Whittier Company has decided to offer two
models of mowers: a mulching mower that
sells for $400 and a riding mower that sells
for $800. The marketing department is
convinced that 1,200 mulching mowers and
800 riding mowers can be sold during the
coming year. The controller has prepared
the following projected income statement,
segmented by product line, based on the
sales forecast:
Sample problem
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9
Sample problem
Definition of terms:
• Directfixed cost – can be traced to each
product or segment and will be eliminated
if the product or segment is eliminated.
• Common fixed cost – not traceable to the
segments and will remain even if the
segments are eliminated.
Sample problem
Requirement 1: Compute for the breakeven point in units and in dollars.

• This cannot be solved by just computing the breakeven point per segment
because it will result to loss equal to the common fixed cost:
Sample problem
• To
compute for the breakeven point, we must combine the
two products in a bundle and solve how many bundles
must be sold to breakeven.
• 1,200 mulching mowers and 800 riding mowers will be
sold.
• 1,200:800 or 3:2
• Sowe will imagine that a bundle or package or the
products will contain 3 mulching mowers and 2 riding
mowers.
 Sample problem
• So the question now is how many bundles or packages
of our product must be sold to breakeven?
• Let us compute for the bundle contribution margin:
Mulching mowers CM per unit = $90,000/1,200 = $75
4 Running mowers CM per unit = $160,000/800 = $200
Bundle CM = (3 x $75) + (2 x $200) = $625
 Sample problem
Bundle CM = (3 x $75) + (2 x $200) = $625
• We must sell enough bundles to cover the
following fixed costs:
o $30,000 direct fixed costs of mulching mower
4 o $40,000 direct fixed costs of running mower
o $26,250 common unavoidable fixed costs
o Total = $96,250
Sample problem
• Bundle CM = (3 x $75) + (2 x $200) = $625
• Total fixed cost = $96,250
$96,250 / $625 = 154 bundles
• How many mulching mowers and running mowers
are there in 154 bundles?
There are 3 mulching mowers and 2 running mowers
in each bundle, thus:
3 x 154 = 462 mulching mowers
2 x 154 = 308 running mowers
Sample problem
• Our
breakeven point in units is 462 mulching
mowers and 308 running mowers.
• Our breakeven point in dollars:
462 x $400 + 308 x $800 = $431,200
Sample problem
To check: