GH Artist Supply, Inc. is a new company that specializes in panels and frames for artists. In a new product line, GH managers plan to create new, eco-friendly panels in three sizes: large, medium, and small. The current budget plan for the first year of operations provides the following information:

Small Medium Large
# of units 200 110 80
Selling price per unit $20 $45 $90
Variable cost per unit $14 $18 $31
Fixed costs $5,000 $2,800 $2,200
Required

Two managers within GH are arguing about the best way to calculate the break-even point in this multi-product scenario. Each has their own method they would like to use.

Compute the break-even point using the two common methods used for multi-product scenarios.

For each method, describe the assumption that is unique to that method.

Solution and Explanation:

1. Individual break even point for each product:

Assumptions:

(i) Individual fixed costs remain constant

(ii) Individual contribution remains constant

                                               Small  Medium  Large

Selling price per unit                      20  45  90

Less: Variable cost per unit                 14  18  31

Contribution per unit                           6  27  59

Fixed costs                                 5000  2800  2200

Break even point

[Fixed costs/ Contribution per unit]  833  104  37

Break even sales in dollars

2. Weighted average contribution method:

Assumptions:

(i) Constant sales mix

(ii) Constant contribution margin ratio

(iii) Constant fixed cost

Fixed costs = 5000 + 2800 +2200= 10,000

Break even point

 Percent of total sales  Contribution Margin ratio  Contribution margin in sales mix ratio  Sales in break even point

Small  51.28%  30%  15.385%              11,208

Medium  28.21%  60%  16.923%                6,164

Large  20.51%  66%  13.447%                4,483

Weighted average contribution    45.755%

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