Budgeting Basics and Beyond

4.5. Sales Mix Analysis

Break-even and cost-volume-profit analysis requires some additional computations and assumptions when a company produces and sells more than one product. In multiproduct firms, sales mix is an important factor in calculating an overall company break-even point.

Different selling prices and different variable costs result in different unit CM and CM ratios. As a result, the break-even points and CVP relationships vary with the relative proportions of the products sold, called the sales mix.

In break-even and CVP analysis, it is necessary to predetermine the sales mix and then compute a weighted average unit CM. It is also necessary to assume that the sales mix does not change for a specified period. The break-even formula for the company as a whole is:

Example 11

Assume that Knibex, Inc., produces cutlery sets out of high-quality wood and steel. The company makes a deluxe cutlery set and a standard set that have these unit CM data:

	Deluxe	Standard
Selling price	$15	$10
Variable cost per unit	12	5
Unit CM	$ 3	$ 5
Sales mix	60%	40%
	(based on sales volume)
Fixed costs	$76,000

The weighted average unit CM = ($3)(0.6) + ($5)(0.4) = $3.80. Therefore, the company's break-even point in units is:

Which is divided in this way:

NOTE

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