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5.7: Break Even Point for Multiple Products

  • Page ID
    10619
  • Although you are likely to use cost-volume-profit analysis for a single product, you will more frequently use it in multi-product situations. The easiest way to use cost-volume-profit analysis for a multi-product company is to use dollars of sales as the volume measure. For CVP purposes, a multi-product company must assume a given product mix or sales mix. Product (or sales) mix refers to the proportion of the company’s total sales for each type of product sold.

    To illustrate the computation of the break-even point for Wonderfood, a multi-product company that makes three types of cereal, assume the following historical data (percent is a percentage of sale, for each product, take the amount / sales and multiply by 100 to get the percentage):

    Product 1  Product 2  Product 3  Total 
    Amount Percent Amount Percent Amount Percent Amount Percent
    Sales      60,000 100%      30,000 100%      10,000 100%    100,000 100%
    Less: variable costs      40,000 67%      16,000 53%        4,000 40%      60,000 60%
    Contribution margin      20,000 33%      14,000 47%        6,000 60%      40,000 40%
    We use the data in the total columns to compute the break-even point. The contribution margin ratio is 40%  (total contribution margin $40,000/total sales $ 100,000). Assuming the product mix remains constant and fixed costs for the company are $50,000, break-even sales are $125,000, computed as follows:
    BE in Sales Dollars = Fixed Costs   $50,000
     = $ 125,000
    Contribution Margin RATIO 0.40

    [To check our answer: ($ 125,000 break even sales X 0.40 contribution margin ratio) – $ 50,000 fixed costs = $ 0 net income.]

    Here is a video example:

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    A YouTube element has been excluded from this version of the text. You can view it online here: http://pb.libretexts.org/temp/?p=328

    Since what we found in our example for Wonderfood is a total, we need to determine how much sales would be needed by each product to break even.  To find the three product sales totals, we multiply total sales dollars by the percent of product (or sales) mix for each of the three products. The product mix for products 1, 2, and 3 is 60:30:10, respectively. That is, out of the $ 100,000 total sales, there were sales of $ 60,000 for product 1, $ 30,000 for product 2, and $ 10,000 for product 3.  An easy way to calculate product or sales mix is to divide each product’s sales by total sales like in the following table:

                            Sales Sales Mix
    Product 1  60,000   60% (60,000 / 100,000)
    Product 2 30,000 30% (30,000 / 100,000)
    Product 3 10,000 10% (10,000 / 100,000)
    Total Sales 100,000 100%

    We can calculate the amount each product needs to sell by multiplying the total break even sales required x the sales mix for each product.  This is calculated as:

    Sales Mix Sales at Break even
    Product 1 60% $ 75,000 (125,000 x 60%)
    Product 2 30%   37,500 (125,000 x 30%)
    Product 3 10% 12,500 (125,000 x 10%)
    Total Sales 100% 125,000

    Be aware!  Predicting sales mix can be extremely different.  If we know we need $125,000 in sales to break even but the sales mix is different from what we budgeted, the numbers will appear quite different (as you should have noticed in the video).  If the sales mix is different from our estimate, the break even point will not be the same.