For this assignment, develop a 4 to 6 page response containing written narrative, figures, and charts.

Question

Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.

●
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.

●
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 to the next whole unit.)

●
What insight does this analysis offer management for long-term planning?

Tanmoy · Accepted Answer

Milano Co.		4
MILANO CO.
Table of Contents
Solution 1	3
Solution 2	4
Solution 3	5
Conclusion	6
References	8
Solution 1.
If the company is able to produce and sell three products which are Product 1, 2 and 3, this means that the selling price and the variable cost per unit will be calculated as follows:
Annual Fixed Cost = $270000
Weighted Average Contribution Margin = 12
Company’s Break-Even Point (in Units) = Total Fixed Cost / Weighted Average Contribution margin
= $270000/ 12
= 22500 units
Break-even point
Product 1 in units = 22500 units x 6/12 = 11250
Product 1 in dollars = 11250 units x $40 = $450000
Product 2 in units = 22500 units x 4/12 = 7500 units
Product 2 in dollars = 7500 units x $30 = $225000
Product 3 in units = 22500 units x 2/12 = 3750 units
Product 3 in dollars = 3750 units x $20 = $75000
	
	Product 1
	Product 2
	Product 3
	Total
	Unit Selling Price
	$40
	$30
	$20
	
	Per unit Variable Cost
	$30
	$15
	$8
	
	Contribution (SP – VC)
	$10
	$15
	$12
	
	Ratio (6:4:2)
	0.50
	0.33
	0.17
	
	Weighted Average Contribution
	5
	5
	2
	12
The contribution margin per composite unit which is called the price of the product is minus the related variable cost will be (Batkovskiy et al. 2017).
= $400 - $256
= $144
Contribution margin ratio
= $144/ $400
= 36%
Solution 2.
Break-even point is considered as the point where the total cost equals the total revenue with respect to a company (Florin-Constantin, 2016). It is calculated by dividing the amount of fixed cost with the contribution margin per unit. Hence, the break-even analysis will be very crucial for Milano Co. for calculation of the prices. This will help Milano in evaluating the optimal prices of the products and also will assist the company in calculating the related costs (Kampf et al. 2016).
The Break-even point in case the company uses the new material
Total New Fixed Cost = $270000 + $50000 = $320000
Then, the Break-even points (in Units) of the company = Total Fixed Cost / Weighted Average Contribution Margin = $320000/ 18.

For this assignment, develop a 4 to 6 page response containing written narrative, figures, and charts. Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their...

Answer To: For this assignment, develop a 4 to 6 page response containing written narrative, figures, and...

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment