Sheltie Company sells both lamps and clocks. Consider the following per unit data:
What is the total revenue in lamps Sheltie Company will need to break even if fixed costs are $149,952?
Solution: The general breakeven point formula for revenues is Fixed Costs ÷ Contribution Margin Ratio. A multi-product firm needs to use the overall contribution margin ratio rather than the contribution margin ratio for an individual product. It is based on the individual contribution margin ratios and the sales mix. While the sales mix is 75% lamps and 25% clocks based on units sold, it is 83.3% lamps and 16.7% clocks based on revenue (3 lamps generate $225 of revenue and 1 clock generates $45 of revenue). The contribution margin ratio is 36% for lamps ($27 ÷ $75) and 33.3% for clocks ($15 ÷ $45). Sheltie's overall contribution margin ratio is 35.6% (36% × 83.3% + 33.3% × 16.7%). This results in needing to generate $421,740 in revenue to break even ($149,952 ÷ 35.6%). Once the total revenue needed is determined, the sales mix based on revenues is used to determine how much revenue each product needs to generate to break even. Based on Sheltie's sales mix, it needs to generate $351,450 in revenue from lamps to break even (83.3% × $421,740).
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