Break Even Problem
Practice Problem: GadgetCo's Break-Even Point
Here is a practice problem demonstrating the calculation of break-even units and sales for a multi-product sales mix.
Break-even analysis is a fundamental tool in managerial accounting, helping businesses determine the sales volume (in units or dollars) required to cover all costs and achieve zero profit . When a company sells multiple products, the analysis becomes more complex due to varying selling prices, variable costs, and contribution margins for each product. This necessitates the use of a sales mix and weighted-average contribution margins .
Product Information:
GadgetCo manufactures and sells two primary products: the "Gizmo" and the "Widget." The company's management wants to determine the break-even point in both units and sales dollars for the upcoming quarter, given their current cost structure and sales mix.
Product Selling Price per Unit Variable Cost per Unit
Gizmo $150 $70
Widget $200 $90
Sales Mix: GadgetCo's sales data indicates that for every 3 Gizmos sold, 2 Widgets are sold.
This translates to a sales mix of 60% Gizmo and 40% Widget (3 / (3+2) = 0.60; 2 / (3+2) = 0.40).
Fixed Costs: Total fixed costs for the upcoming quarter are projected to be $220,000.
Required: Calculate GadgetCo's break-even point in:
Total units.
Units for each product.
Total sales dollars.
Sales for each product.