A sales mix is a set of proportions of each product in total sales if a business sells multiple products. Furthermore, these products are not equally profitable for a business, so a contribution margin approach is usually used in break-even analysis with a sales mix or multiple products. Please note the additional assumption that the proportion of each product in total sales is constant during the accounting period.
Under the contribution margin approach, break-even analysis with a sales mix involves three steps.
Step 1. Calculate the per unit amount of contribution margin for each product.
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit
Step 2. Calculate the weighted average contribution margin,
|Weighted Average Contribution Margin =||N||CMi × wi|
|i = 1|
where CMi is the per unit amount of contribution margin of a relevant product, and wi is a proportion of a relevant product in a sales mix.
Step 3. Calculate the break-even point for each product both in units and dollars.
|BEP in Units =||Fixed Costs||× Percentage of Sales Mix|
|Weighted Average Contribution Margin|
The dollar amount for each product can be calculated by multiplying the break-even sales in units by the sales price of a relevant product.
Alternatively, the break-even point in dollars for multiple products can be calculated as follows:
|BEP in Dollars =||Fixed Costs|
|Contribution Margin Ratio|
In turn, the formula to calculate the contribution margin ratio is as follows:
|Contribution Margin Ratio =||Total Sales - Total Variable Costs|
X-One Fashion LLC is selling three products: jeans, T-shirts, and sweaters. Information about expected sales price, variable costs, fixed costs, and the proportion in the sales mix for the second quarter is shown in the table below.
We should calculate the contribution margin per unit for each product as the first step in break-even analysis for the sales mix.
CM per Units Jeans = $85 - $50 = $35
CM per Units T-Shirts = $45 - $35 = $10
CM per Units Jeans = $90 - $60 = $30
Calculation of the weighted average contribution margin is the second step in break-even analysis.
Weighted Average Contribution Margin = $35×0.40 + $10×0.45 + $30×0.15 = $23
As the third step, we should calculate the break-even point for each product.
BEP in Units Jeans = ($690,000 ÷ $23) × 0.40 = 12,000
BEP in Units T-Shirts = ($690,000 ÷ $23) × 0.45 = 13,500
BEP in Units Jeans = ($690,000 ÷ $23) × 0.15 = 4,500
BEP in Dollars Jeans = 12,000 × $85 = $1,020,000
BEP in Dollars T-Shirts = 13,500 × $45 = $607,500
BEP in Dollars Jeans = 4,500 × $90 = $405,000
BEP in Dollars Total = $1,020,000 + $607,500 + $405,000 = $2,032,500
Assume that the actual performance of X-One Fashion LLC in the second quarter was as follows:
Let’s calculate the break-even point in dollars for the sales mix.
Sales Jeans = $85 × 11,000 = $935,000
Sales T-Shirts = $45 × 14,000 = $630,000
Sales Jeans = $90 × 6,000 = $540,000
Total Sales = $935,000 + $630,000 + $540,000 = $2,105,000
Variable Costs Jeans = $50 × 11,000 = $550,000
Variable Costs T-Shirts = $35 × 14,000 = $490,000
Variable Costs Jeans = $60 × 6,000 = $360,000
Total Variable Costs = $550,000 + $490,000 + $360,000 = $1,400,000
Contribution Margin Ratio = ($2,105,000 - $1,400,000) ÷ $2,105,000 = 0.335
BEP in Dollars Total = $690,000 ÷ 0.335 = $2,059,701.49