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In this accounting lab report, we will analyze the financial situation of The Kenosha Company, which produces three different product lines of beer mugs: A, B, and C, each with varying contribution margins. The president of the company envisions a sales forecast for the coming period, including 25,000 units of A, 100,000 units of B, and 50,000 units of C. The fixed costs for this period amount to $351,000. We will address four specific requirements to better understand the company's financial position and decision-making.
To determine the company's breakeven point in units while maintaining the given sales mix, we need to calculate the breakeven point for each product line and then combine them based on the sales mix.
The contribution margins for the three product lines are $5 for A, $4 for B, and $3 for C. We can calculate the breakeven point in bundles using the formula:
| Product | Contribution Margin | Units for Breakeven |
|---|---|---|
| A | $5 | 70,200 |
| B | $4 | 87,750 |
| C | $3 | 117,000 |
| Total | $12,750 | 275,950 |
The breakeven point for the company, considering the sales mix, is 13,000 units of A, 52,000 units of B, and 26,000 units of C.
If the sales mix is maintained, and 175,000 units are sold, we can calculate the total contribution margin and operating income as follows:
| Product | Units Sold | Contribution Margin |
|---|---|---|
| A | 25,000 | $125,000 |
| B | 100,000 | $400,000 |
| C | 50,000 | $150,000 |
| Total | 175,000 | $675,000 |
The operating income is calculated by subtracting the fixed costs ($351,000) from the total contribution margin, resulting in an operating income of $324,000.
If the company sells 25,000 units of A, 75,000 units of B, and 75,000 units of C, we can calculate the new operating income as follows:
| Product | Units Sold | Contribution Margin |
|---|---|---|
| A | 25,000 | $125,000 |
| B | 75,000 | $300,000 |
| C | 75,000 | $225,000 |
| Total | 175,000 | $650,000 |
The new operating income, after considering this sales mix, is $299,000. The breakeven point, in this case, is 13,500 units of A, 40,500 units of B, and 40,500 units of C.
Now, let's compare the breakeven points calculated in Requirement 1 and Requirement 3. The breakeven points are as follows:
| Requirement | Product A | Product B | Product C |
|---|---|---|---|
| Requirement 1 | 13,000 | 52,000 | 26,000 |
| Requirement 3 | 13,500 | 40,500 | 40,500 |
Comparing the two sets of breakeven points, we can see that the breakeven points are different when the sales mix changes.
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It is not always better for a company to choose the sales mix that yields the lower breakeven point. The choice should consider factors beyond just the breakeven point.
Option C, "No, it is not always better to choose the sales mix with the lowest breakeven point because this calculation ignores the demand for the various products. The company should look to and sell as much of each of the 3 products as it can to maximize operating income even if this means that this sales mix results in a higher breakeven point," is the correct choice.
Choosing a sales mix should consider market demand, product popularity, and strategic goals. Maximizing operating income may involve selling more of a product with a lower contribution margin if there is higher demand for it. It's important for companies to strike a balance between cost-effectiveness and market responsiveness.
In conclusion, understanding the breakeven point and the impact of different sales mixes on operating income is crucial for effective decision-making in businesses. The Kenosha Company should consider multiple factors when determining its sales mix, rather than solely focusing on the breakeven point, to maximize its profitability and respond to market dynamics.
Financial Analysis for The Kenosha Company. (2024, Jan 24). Retrieved from https://studymoose.com/document/financial-analysis-for-the-kenosha-company
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