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Assignment 3 - Practice 3 CVP Analysis - Multi-Product

Mikaela Inc. sells small, medium, and large umbrellas. It has annual fixed costs of P19,520,000. Historically, 20% of sales are small and large umbrellas each, with the remaining 60% being medium umbrellas. To break even, Mikaela needs to sell a total of 32,000 umbrellas. Specifically, it needs to sell 19,200 medium umbrellas to break even. If demand for large umbrellas increases, the break-even point will decrease as large umbrellas have the highest contribution margin.

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2K views

Assignment 3 - Practice 3 CVP Analysis - Multi-Product

Mikaela Inc. sells small, medium, and large umbrellas. It has annual fixed costs of P19,520,000. Historically, 20% of sales are small and large umbrellas each, with the remaining 60% being medium umbrellas. To break even, Mikaela needs to sell a total of 32,000 umbrellas. Specifically, it needs to sell 19,200 medium umbrellas to break even. If demand for large umbrellas increases, the break-even point will decrease as large umbrellas have the highest contribution margin.

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Copyright
© © All Rights Reserved
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Mikaela Inc. sells three sizes of umbrellas: small, medium, and large.

The
company has annual fixed costs of P19,520,000. For the past several years, 20%
of Hugo's sales have been the small and large umbrellas with the remaining 60%
being the medium size. Mikaela does not expect this to change in the upcoming
year.
The following information is also available for each of the umbrellas:
  Small   Medium   Large
Sales price per unit P400   P700   P1,750
Variable costs per
150   200   450
unit
Required:
How many total umbrellas does the company need to produce and
A.
sell in order to break even? (3 pts.)
How many medium umbrellas need to be sold in order to break even?
B.
(3 pts.)
If Mikaela experiences a higher demand of large umbrellas than it
C
anticipated, will the break-even point increase, decrease, or stay the
.
same? Why? (4 pts.)

Answers:
A.
Small Per Unit Medium Per Unit Large Per Unit
Sales 2,560,000 P400 13,440,00 P700 11,200,000 P1,750
0
Less: 960,000 150 3,840,000 200 2,880,000 450
Variable
Costs
Contributio 1,600,000 250 9,600,000 500 8,320,000 1,300
n Margin
Less: Fixed 19,520,000
Costs
Net Income 0

Sales Mix
Small: 20% x P250 = P50
Medium: 60% x P500 = 300
Large: 20% x P1,300 = 260
Weighted-Average Contribution Margin per Unit = P610

Break-even Point in Units


= Fixed Cost / Weighted-Average Contribution Margin per Unit
= P19,520,000 / P610
= 32,000 umbrellas

2. 32,000 x 0.60 = 19,200 medium umbrellas

3. If Mikaela experiences a higher demand of large umbrellas than it anticipated, the


break-even point will decrease.
Explanation: On the table above, we could notice that the large umbrellas have the
highest contribution margin. When the volume shifts toward selling more of the product
with the highest contribution margin, the weighted-average contribution margin
increases. Consequently, the break-even point will decrease because the it has an
indirect relationship with the weighted-average contribution margin.

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