The Janowski Company has three product lines of mugs-A, B, and C- with contribut

Question

The Janowski Company has three product lines of mugs-A, B, and C- with contribution margins of $5, $4 and $3. respectively. The president foresees of 168,000 units in the coming period, consisting of 24,000 units of A, 96,000 units of B, and 48,000 units of C. The company's fixed costs for the period are $405,000. What is the company's breakeven point in units, assuming that the given sales mix is maintained If the sales mix is maintained, What is the total contribution margin when 168,000 units are sold What is the operating income What would operating income be if the company sold 24,000 units of A, 48,000 units of B, and 96,000 units of C What is the new breakeven point in units if these relationships persist in the next period Comparing the breakeven points in requirements 1 and 3, is it always better for a company to choose the sales mix that yields the lower breakeven point Explain.

Explanation / Answer

1)

Ratio of production of A:B:C

= 24,000:96,000:48,000

= 1:4:2

So, overall contribution = 1 x $ 5 + 4 x $ 4 + 2 x $ 3 = $ 27

So, breakeven point in units

= Fixed Cost / Contribution mix

= $ 405,000 / $ 27

= 15,000

So, A = 15,000 units, B = 15,000 x 4 = 60,000 units, C = 15,000 x 2 = 30,000 units.

2)

Total Contribution margin when 168,000 units are sold

= 24,000 x $ 5 + 96,000 x $ 4 + 48,000 x $ 3

= $ 648,000

Operating Income = Contribution - Fixed Costs

= $ 648,000 - $ 405,000

= $ 243,000

3)

Operating Income when new mix is followed:

= 24,000 x $ 5 + 48,000 x $ 4 + 96,000 x $ 3 - $ 405,000

= $ 195,000

Ratio of production of A:B:C

= 24,000:48,000:96,000

= 1:2:4

So, overall contribution = 1 x $ 5 + 2 x $ 4 + 4 x $ 3 = $ 25

So, breakeven point in units

= Fixed Cost / Contribution mix

= $ 405,000 / $ 25

= 16,200

So, A = 16,200 units, B = 16,200 x 2 = 32,400 units, C = 16,200 x 4 = 64,800 units.

4)

The sales mix which yields lower breakeven point results in lower Sales target which is easy to achieve. So, from one point of view it can be better to choose lower breakeven point if the sales of each of the product in the product mix is equally likely.

But, if the sales of one of the products or a combination of the products of the product mix is more effective than another product in the product mix which is yielding higher contribution, than the product mix which is more effective but having a lower contribution margin, then the company may choose to sell the product with lower contribution margin which may result in higher breakeven target. This is advisable as the company will be able to achieve breakeven more easily with lower contribution margin products than higher one if the sales of lower margin products is more effective.

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