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Q: Sales Mix - break even sales volume ( Answered,   0 Comments )
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 Subject: Sales Mix - break even sales volume Category: Business and Money > Accounting Asked by: gofigure99-ga List Price: \$10.00 Posted: 06 Aug 2005 21:10 PDT Expires: 05 Sep 2005 21:10 PDT Question ID: 552626
 ```Product category sales price invoice cost sales commission High quality 500 275 25 medium quality 300 135 15 The store aniticpates selling 480 computers, 360 of medium quality. Annual fixed costs are \$65,000 What is the shops sales mix? What is the shops break-even sales volume in dollars How many computers of each type need to be sold to earn a target net income of \$48,750```
 ```Gofigure2 ? A couple of these questions have at least two answers ? one based on units and one based on sales revenues. In fact, there?s a third potential answer to question #1 based on profitability. SALES MIX ? VOLUME The store sells 480 computers each year, with 120 high quality (HQ) and 360 medium quality (MQ). By volume the mix is: MQ : 75% HQ : 25% SALES MIX ? REVENUES The mix is different if analyzed by revenues because of the different prices: MQ: 300 * 360 = \$108,000 ; \$108,000/\$168,000 = 64.3% HQ: 500 * 120 = \$60,000; \$60,000/\$168,000 = 35.7% SALES MIX ? PROFITABILITY Your account would say that neither revenue nor volume mixes count (even though they do if you?re deciding what to advertise; how to attract new customers; how to predict accessory or service revenues; and dozens of other management decisions). Look at your profitability mix, the accountant would say: Gross margin, MQ = \$300 - \$135 - \$15 = \$150 Gross margin, HQ = \$500 - \$275 - \$25 = \$250 Gross profits, MQ = \$150 * 360 = \$54,000; \$54,000/\$84,000 = 64.3% Gross profits, HQ = \$250 * 120 = \$30,000; \$30,000/\$84.000 = 35.7% It matches your revenue sales mix ONLY because both MQ and HQ computers have the same contribution margin of 50% (contribution margin = gross margin/sales price). Because contribution margins are rarely identical in the real world, having a profitabiity mix match revenue mix is rare. --- BREAK EVEN SALES VOLUME This question has a single answer ? only because the contribution margin is 50%. If the two lines of computers had different margins, there would be several possible answers. Each dollar sold is generating 50% in contribution. \$100,000 in sales generates \$50,000 in contribution dollars. What will it take to get \$65,000 in contribution to cover fixed costs? \$65,000 = Sales * 0.50; Sales = \$130,000 *** A second way to look at this is to take existing sales of \$168,000; profits of \$19,000 and ask ? ?how much would sales decrease to erase the \$19,000 net profit?? \$19,000 = Sales decrease * 0.50 Sales decrease = \$38,000 ? so that if revenues dropped from \$168,000 to \$130,000 the company would be back at break-even --- TARGET NET INCOME To get to a net income of \$48,750, revenues will need to be at: \$48,750 = [(0.50) * Sales] - \$65,000 \$113,750 = 0.50 * Sales Sales = \$227,500 MQ: we could sell only MQ models, then we?d need 759 to hit the target HQ: we could sell only HQ models, then we?d need to sell only 455 systems As you can tell, depending on the mix, there are a large number of potential answers here. But let?s go back to the original volume assumptions of 75%-25% -- 0.75 * \$300 * x + 0.25 * \$500 * x = \$227,500 \$225x + \$125x = \$227,500; x = 650 So, selling 650 computers in a mix of 75% MQ and 25% HQ would hit your target. Note that we could recalculate the number of computers based on the REVENUE MIX ? and get yet another answer. But there are lots of potential answers to this one: you could arbitrarily assume that 50 HQ computers get sold and calculate another total to produce the net income of \$48,750. Best regards, Omnivorous-GA``` Request for Answer Clarification by gofigure99-ga on 07 Aug 2005 21:15 PDT ```Under target net income, where do you get the .50 that you multiplied by the sales? I got 700 computers 175 H and 525 M``` Clarification of Answer by omnivorous-ga on 08 Aug 2005 00:48 PDT ```Gofigure2 -- The 0.50 represents the contribution margin, which is the same for each computer. The 0.25 and the 0.75 represents the weighting of each (75%-25%). Your 700 computers are too many -- they produce a profit of \$57,500 -- 525 MQ = \$87,500 175 HQ = \$157,500 Contribution margin = \$122,500 Net profit = \$122,500 - \$65,000 = \$57,500 -- The number 650 doesn't split well -- we end up with 1/2 computer of each type. But we'll round numbers up: MQ: 487 * \$300 = \$146,100 HQ: 163 * \$500 = \$81,500 Contribution margin = 0.50 * \$227,600 = \$113,800 Net profit = \$113,800 - \$65,000 = \$48,800 That's \$50 more profit than required -- but it's as close as you'll get with the 75%-25% split. Best regards, Omnivorous-GA```