Multiple-Product Analysis

Whittier Company has decided to offer two models of lawn mowers:

a mulching mower to sell for $400 and a riding mower to sell for $800. The
Marketing Department is convinced that 1,200 mulching mowers and 800
riding mowers can be sold during the coming year. The controller has
prepared the following projected income statement based on the sales
forecast:


The direct fixed expenses are those fixed costs that
can be traced to each product and would be avoided
if the product did not exist.
The common fixed expenses are the fixed costs that
are not traceable to the products and would remain
even if one of the products was eliminated.

Break-Even Point in Units
For two products, there are two unit contribution
margins. The mulching mower has a contribution
margin per unit of $75 ($400 $325), and the riding
mower has one of $200 ($800 $600). One possible
solution is to apply the analysis separately to each
product line. It is possible to obtain individual break-
even points when income is defined as product
margin. Breakeven for the mulching mower is as
follows:
Mulching mower break-even units :
Fixed cost/(Price Unit variable cost) = $30,000/$75
= 400 units
Riding mower break-even units :
Fixed cost/(Price Unit variable cost) = $40,000/$200
= 200 units
Thus, 400 mulching mowers and 200 riding
mowers must be sold to achieve a break-even
product margin.
Determining the Sales Mix
Sales mix is the relative combination of
products being sold by a firm. The sales mix
can be measured :
In units sold or in proportion of revenue.
By the percent of total revenue contributed by
each product.

Find sales mix in units sold or in proportion of revenue :
For example, if Whittier plans on selling 1,200 mulching
mowers and 800 riding mowers, then the sales mix in units is
1,200:800. Usually, the sales mix is reduced to the smallest
possible whole numbers. Thus, the relative mix, 1,200:800,
can be reduced to 12:8 and further to 3:2. That is, for every
three mulching mowers sold, two riding mowers are sold.
Find sales mix By the percent of total revenue contributed by
each product :
The mulching mower revenue is $480,000 ($400
1,200), and the riding mower revenue is $640,000 ($800
800). The mulching mower accounts for 42.86 percent of
total revenue, and the riding mower accounts for the
remaining 57.14 percent.


Given the package contribution margin, the fundamental break-
even equation can be used to determine the number of
packages that need to be sold to breakeven. From Whittiers
projected income statement, we know that the total fixed costs
for the Company are $96,250. Thus, the break-even point is:
Break-even packages = Fixed cost/Package contribution margin
= $96,250/$625
= 154 packages
Sales Mix and CVP Analysis
Whittier must sell 462 mulching mowers (3x154) and 308
riding mowers (2x154) to break even. An income statement
verifying this solution is presented in this table :
Sales Dollars Approach
The break-even point in sales dollars implicitly uses the
assumed sales mix but avoids the requirement of building a
package contribution margin.
No knowledge of individual product data is needed. The
computational effort is similar to that used in the single-
product setting.