Bepompf

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Break even point of multi product firms

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Bepompf

  1. 1. Break even point analysis of multi-product firm SUJITH K. OOMMEN
  2. 2. MULTI PRODUCTS SITUATION ASSUMPTIONS - The fixed cost for producing all products are same - The ratio of products sold is assumed constantEquation BREAK EVEN POINT FIXED COST (IN UNITS) = WEIGHTED AVG. C.M. PER UNIT WEIGHTED AVG CM = TOTAL CM TOTAL OUTPUT
  3. 3. Example: - Assume that a company sells two products: Product A and Product B. The sales prices are Rs10 for product A and Rs15 for product B. Variable costs per unit are Rs8 for Product A and 9 for Product B. The company has TOTAL FIXED costs of Rs5,000. Assume the company expects to sell 1,500 units of Product A and 500 units of Product B.
  4. 4. UNITS 1,500 500 2,000 Product A Product B TOTAL Sales Rs 15,000 Rs 7,500 Rs 22,500 Variable costs Rs (12,000) Rs (4,500) Rs (16,500) Contribution Margin Rs 3,000 Rs 3,000 Rs 6,000 Fixed Costs Rs (5,000) Net Income Rs 1,000
  5. 5. Weighted Average CM - Take the Total CM (Rs6,000 in example) and divide by total units (2,000 in example). - In example this gives a Weighted Average CM of Rs3 per unit.
  6. 6. Weighted Average CM UNITS 1,500 500 2,000 Product A Product B TOTAL Sales Rs 15,000 Rs 7,500 Rs 22,500 Variable costs Rs (12,000) Rs (4,500) Rs (16,500) Contribution Margin Rs 3,000 Rs 3,000 Rs 6,000 Fixed Costs Rs (5,000) Net Income Rs 1,000 Weighted Average CM is Rs6,000/2,000 units = Rs3/unit
  7. 7. Calculating the Breakeven Point in Units(firm) Breakeven units = FC / Wt. avg. CM Breakeven Units (firm): 5000 / 3 = 1,667 FC VC TC BEP-1667 UNITS
  8. 8. Breakeven Point in units (products) Take the total units to be sold at the breakeven point (1,667) and multiply by each product’s proportion PRODUCT A: 1,667 * (1,500/2,000) = 1250 units PRODUCT B: 1,667 * (500/2,000) = 417 units
  9. 9. Thank you

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