Patriot Co. manufactures and sells three products: red, white, and blue. Their u
ID: 2422695 • Letter: P
Question
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red, $20; white, $35; and blue, $65. The per unit variable costs to manufacture and sell these products are red, $12; white, $22; and blue, $50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $250,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by $6; white, by $12; and blue, by $10. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.
1. Assume if the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product. (Round composite units up to next whole number.)
2. Assume if the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product. (Round composite units up to next whole number.)
Explanation / Answer
1. For product Red =
Relative fixed costs = 250000*50% = $ 125,000
Contribution per unit = 20-12 = $ 8
Therefore Breakeven uits = 125000/8 = 15,625 units
Sales value for breakeven = 15,625 units * 20 = $ 312,500
For product white =
Relative fixed costs = 250000*40% = $ 100,000 fixed costs
Contribution per unit = 35-22 = $ 13
Therefore Breakeven uits = 125000/13 = 7,692 units
Sales value for breakeven = 7,692 units * 35 = $ 269,230
For Product Blue =
Relative fixed costs = 250000*20% = $ 50,000 fixed costs
Contribution per unit = 65 - 50 = $ 15
Therefore Breakeven uits = 50,000/15 = 3,333 units
Sales value for breakeven = 3,333 units * 65 = $ 216,666
2. Since Fixed Costs increase by 50,000
For Product Red =
Relative fixed costs = 300000*50% = $ 150,000
Contribution per unit = 20-6 = $ 14
Therefore Breakeven uits = 150,000/14 = 10,714 units
Sales value for breakeven = 10,714 units * 20 = $ 214,280
for Product White =
Relative fixed costs = 300000*40% = $ 120,000
Contribution per unit = 35-10 = $ 25
Therefore Breakeven uits = 120,000/25 = 4,800units
Sales value for breakeven = 4,800 units * 35 = $ 168,000
For Product Blue =
Relative fixed costs = 300000*20% = $ 60,000 fixed costs
Contribution per unit = 65 - 40 = $ 25
Therefore Breakeven uits = 60,000/25 = 2,400 units
Sales value for breakeven = 2,400 units * 65 = $ 156,000