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Sales Mix & Effect on Break-Even Sales

Instructor: Alexis Muench

Alexis is a licensed CPA with 15 years of real world experience with a BSBA in Accounting

What could sales mix, the break even point, targeted net income and margin of safety possibly have to do with baking cookies? Well just like the ingredients in your cookies, a company's mix of products they sell can affect how much money they make. In this lesson we'll explore how you, as the manager of Baker's Dozen apply this theory to meeting customer demands.

Sales Mix and Break Even

The sales mix is a calculation that determines the proportion of each product a business sells. Here it will be the amount of each type of cookies that we sell. This amount is calculated based on the needs of a company's customers, as well as what a company is able to produce. Once we know the sales mix we can determine the break even point which is the point at which total cost and total revenue are equal. This tells us how many dozens of cookies we need to make in order to cover our costs to operate the company as well as make the cookies.

Imagine you run Baker's Dozen and it's your job to determine how many dozens of cookies your production team needs to make to meet your customer's needs this month.

Let's first look at the formula for the break even point:

Break Even Point = Fixed Costs / Weighted Average of Contribution Margin

Fixed costs are the costs that a company has to pay whether they sell one dozen cookies or one thousand dozen cookies. These are items like rent, salaries, etc. and don't vary substantially from month to month.

The contribution margin is the difference between the sale price and the variable price, or the money left over to pay expenses after your variable costs are covered. Variable costs are costs that vary in direct relation to how many cookies you bake. These are items like the sugar and peanut butter used to make the cookies. How much you spend depends on how many you make.

The sales price is the price you charge to sell your product to customers.

Based on demand, you have been told that your sales mix is 40% chocolate chip, 25% peanut butter and 35% sugar cookies to hit your 100% production capacity. Each cookie has different variable costs:

Types of Cookies Variable Cost Selling Price
Chocolate Chip $2.50 $6.50
Peanut Butter $2.00 $5.00
Sugar Cookies $1.50 $4.50

With this information, we are able to calculate the break even point.

Step 1: Calculate the contribution margin (CM) for each cookie

Types of Cookies Selling Price - Variable Cost = Contribution Margin
Chocolate Chip $6.50 - $2.50 = $4.00
Peanut Butter $5.00 - $2.00 = $3.00
Sugar Cookies $4.50 - $1.50 = $3.00

Step 2: Calculate the weighted average of the CM for all cookies

Why the weighted average? Since we are calculating the break even point for multiple products, we need to know the weighted average of the contribution margin so it can be applied to the break even formula. We do this by multiplying the percentage of each cookie in the sales mix by its contribution margin:

Types of Cookies Sales Mix (% of Sales x Contribution Margin)
Chocolate Chip $4.00 x 40% = $1.60
Peanut Butter $3.00 x 25% = $0.75
Sugar Cookies $3.00 x 35% = $1.05
Weighted CM = $1.60 + $0.75 + $1.05
Total Weight CM = $3.40

Step 3: Calculate Break Even Point

Now that we have our weighted average CM, we can proceed to calculating our break even units! Let's assume that fixed cost for the month are $15,000. The number of break-even units is calculated by dividing the weighted conventional margin into the fixed costs for the month:

Break Even Point = $15,000 / $3.40

Break Even Point = 4,412 (rounded)

Step 4: Calculate Sales Mix in Units

What does the 4,412 tell us? It tells us that based on our product mix we have to make 4,412 dozen cookies to hit our break even point. So how do we apply that to each type of cookie? We simply break the 4,412 units out by each cookie's sales mix percentage.

Chocolate Chip: 4,412 x 40% = 1,765 dozen

Peanut Butter: 4,412 x 25% = 1,103 dozen

Sugar Cookie: 4,412 x 35% = 1,544 dozen

Margin of Safety

With the break even point based on the above sales mix calculated, what could you, as the manager of Baker's Dozen use this information for? One way is to determine the margin of safety. The margin of safety is how much output or sales levels can fall before reaching the break even point. The formula for margin of safety is:

Margin of Safety = Current Sales Units - Break Even Units

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