Patriot Co. manufactures and sells three products: red, white, and blue. Their u
ID: 2595747 • Letter: P
Question
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit sales prices are red, $55; white, $85; and blue, $110. The per unit variable costs to manufacture and sell these products are red, $40; white, $60; and blue, $80. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $150,000. 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 $10; white, by $20; and blue, by $10. However, the new material requires new equipment, which will increase annual fixed costs by $20,000.
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit sales prices are red, $55; white, $85; and blue, $110. The per unit variable costs to manufacture and sell these products are red, $40; white, $60; and blue, $80. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $150,000. 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 $10; white, by $20; and blue, by $10. However, the new material requires new equipment, which will increase annual fixed costs by $20,000.
Explanation / Answer
1. If company continues to use the old material:
Break-even poin in composite units = Total fixed costs divided by contribution margin per unit = $150,000 divided by (835 - 600) = 638 composite units.
Break-even point in units and sales dollars of each individual product:
Number per
composite Unit
Number of composite
units to break-even
Unit sales at the
break-even point
Dollar sales at the
break-even point
2. If the company uses the new material:
Note: Variable costs per unit of Red, white and blue have been reduced by $10, 20 and 10 respectively.
Since the company uses new material, the annual fixed costs show an increase of $20,000 which when added to the current fixed costs $150,000 amounts to $170,000.
Break-even poin in composite units = Total fixed costs divided by contribution margin per unit = $170,000 divided by (835 - 450) = 442 composite units.
Break-even point in units and sales dollars of each individual product:
Number per
composite Unit
Number of composite
units to break-even
Unit sales at the
break-even point
Dollar sales at the
break-even point
Selling price per composite unit Ratio Selling price per unit Total per composite unit Red 5 $55 $275 White 4 85 340 Blue 2 110 220 $835 Variable cost per composite unit Ratio Variable cost per unit Total per composite unit Red 5 $40 $200 White 4 60 240 Blue 2 80 160 $600