Multiple Product Break-Even Analysis Joe\'s Tax Service prepares tax returns for
ID: 2610331 • Letter: M
Question
Multiple Product Break-Even Analysis
Joe's Tax Service prepares tax returns for low-to middle-income taxpayers. Its service operates January 2 through April 15 at a counter in a local grocery store. All jobs are classified into one of three categories: standard, multiform, and complex. Following is information for last year. Also, last year, the fixed cost of rent, utilities, and so forth were $55,000.
Required
(a.) Determine Joe's break-even dollar sales volume.
Round contribution margin to three decimal places.
Round break-even sales volume to the nearest dollar.
Product
Weighted
Selling Price
Weighted
Contribution
Margin
(b.) Determine Joe's margin of safety in sales dollars.
Round answer to the nearest dollar.
$Answer
Explanation / Answer
(a.) Break even Sales (Volume) - Sales volume at which there is no profit no loss for a company is called break even point. To achieve break even, company's contribution margin should be equal to fixed costs of the company.
Break even sales (Volume) = Fixed costs / Contribution margin per unit
Following will be the solution:
Product
Weighted Selling Price
Weighted Contribution Margin
Standard
1750 (returns) * $55 =$96250
1750 (returns) * $25 =$96250
Multiform
500 (returns) * $130 = $65000
500 (returns) * $55 = $65000
Complex
250 (returns) * $255 = $63750
250 (returns) * $105 = $63750
Total
$225,000
$97500
Contribution Margin ratio :
(Weighted Contribution Margin/Weighted total sales)
$97500/$225,000 = 43.333%
Break even sales Volume
Fixed Cost /Contribution per unit
$55000/$39* = 1410 returns
Note : *Contribution per Unit = $97500/2500 (returns) = $39/ return
Sales per unit = $225,000/2500 (returns) = $100/return ( will be used for b. part of the answer)
You can cross verify answer in following way:
Consider 1410 returns are divided in Standard, multiform & complex product in the same ratio of 1750:500:250
You will get Standard, multiform & complex returns as 987, 282, 141 respectively. by multiplying each type of returns with respective contribution margin you will get total contribution of $55000. Our contribution margin & fixed costs are same and hence you will reach break even point.
(b.) Margin of safety = Sales that can be lost before company starts to make losses
= (Total Sales volume - Breakeven Sales volume)* Selling price
= $225,000 - (1410 * 90)
= $98077
You can cross check this answer as following:
Your Contribution margin on sale of $225,000 is $97500
If you lose sales of $98077, you will lose Contribution margin of (98077*43.333%) $42500
Fixed costs are $55,000
Hence, beyond this point company will start to make losses
Hope you get your answer
Feel free to ask for any clarification
Happy Chegging
Product
Weighted Selling Price
Weighted Contribution Margin
Standard
1750 (returns) * $55 =$96250
1750 (returns) * $25 =$96250
Multiform
500 (returns) * $130 = $65000
500 (returns) * $55 = $65000
Complex
250 (returns) * $255 = $63750
250 (returns) * $105 = $63750
Total
$225,000
$97500
Contribution Margin ratio :
(Weighted Contribution Margin/Weighted total sales)
$97500/$225,000 = 43.333%
Break even sales Volume
Fixed Cost /Contribution per unit
$55000/$39* = 1410 returns
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