Can anyone explain this questoin please?

  • Creator
    Topic
  • #202354
    Vanessachy
    Participant

    A company produces and sells two products. The first product accounts for 75% of units sold and the second product accounts for the remaining 25% of units sold. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the breakeven point, what number of units of the first product will have been sold?

    A.

    52,000

    B.

    39,000

    Incorrect C.

    25,000

    D.

    14,625

    This is the explanation, but I don’t understand why they would use both costs for calculation? I used 100000/(10-6), it is asking first product.

    Total fixed costs of $312,000 ($100,000 from Product 1 and $212,000 from Product 2) must be covered by the contribution margin of the two products combined.

    We know three times as many Product 1 units are sold as Product 2 units because 75% of unit sales is from Product 1. If we imagine a product package of 3 units of Product 1 and 1 unit of Product 2, it would be sold for (3 Ă— $10) + $25, or $55. The variable cost of the package would be 3 Ă— $6, or $18 for Product 1, plus $13 for Product 2, a total variable cost of $31. The contribution margin of the package would be $24 ($55 – $31).

    Breakeven package units = Fixed costs Ă· Contribution margin per package = $312,000 Ă· $24 = 13,000 package units

    Since there are 3 units of Product 1 in each package, sales of Product 1 will be 3 Ă— 13,000 packages, or 39,000 units of Product 1.

    Far, 64 82
    Reg, 60 86
    Aud, 74 82
    Bec, 70 81
    Done done done! I did it!!!
    Licensed CPA in MA, issued October 2016

    Far 10/26/2015, 64, 1/4/2016, 82
    Reg 7/10/2015, 60, 2/27/2016, 86
    Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
    Bec, 6/10/2016, 70,9/8 retake

Viewing 6 replies - 1 through 6 (of 6 total)
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    Replies
  • #779249
    Missy
    Participant

    You don't break even until your total sales equal your total costs. If you sold 25,000 of product 1 you'd still be at a loss overall.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #779250
    leglock
    Participant

    This is one of those questions that is made for just using the answers available to determine what the correct answer is.

    You know product 1 accounts for 75% of units sold, and product 2 accounts for 25% and they want to know total units sold to get to your breakeven of 312,000. Product 1 contribution margin is $4 and Product 2 is $12. Again remember that you will be selling 3x as many units of product one as you are product 2.

    So answer A is 52000 units. This would have to mean 39,000 (52000*.75) units of product one were sold and 13000 (39000*.25) of product 2 were sold. If this were the case, you would test if 39000*$4 contribution margin + 13000*$12 contribution margin equals 312,000. It does so you know that's the answer.

    #779251
    Missy
    Participant

    Leglock this is one of those worded to trip you up. A is not the answer because the question is how many units of product 1 need to be sold and the answer is 39,000.

    Vanessachy allocating costs is for purposes of costing and see based on estimates. If the actual numbers are lower then not all of the costs get applied. With fixed costs they still exist regardless of actual sales so the allocations of the fixed costs is extraneous information added to confuse you.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #779252
    Vanessachy
    Participant

    I redid it and it does make sense, because they need to consider both products.
    So it is 10x+25x=100000+212000+13x+16x, x=19500, 19500*2
    Only one thing, the question is asking about first product, why they don't allocate product 1? 39000 is both product unit

    Far, 64 82
    Reg, 60 86
    Aud, 74 82
    Bec, 70 81
    Done done done! I did it!!!
    Licensed CPA in MA, issued October 2016

    Far 10/26/2015, 64, 1/4/2016, 82
    Reg 7/10/2015, 60, 2/27/2016, 86
    Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
    Bec, 6/10/2016, 70,9/8 retake

    #779253
    Missy
    Participant

    The total units required to break even is 52,000 of which 39,000 are product one and 13,000 are product 2.

    Old timer,  A71'er since 2010.

    Finance manager/HR manager

     

     

    Licensed Massachusetts Non Reporting CPA since 2012
    Finance/Admin/HR Manager

    #779254
    Vanessachy
    Participant

    @Mla, my calculation must be wrong, I need to take a look again, thank you!

    Far, 64 82
    Reg, 60 86
    Aud, 74 82
    Bec, 70 81
    Done done done! I did it!!!
    Licensed CPA in MA, issued October 2016

    Far 10/26/2015, 64, 1/4/2016, 82
    Reg 7/10/2015, 60, 2/27/2016, 86
    Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
    Bec, 6/10/2016, 70,9/8 retake

Viewing 6 replies - 1 through 6 (of 6 total)
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