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4 - Multiproduct Break-Even Point

This document discusses calculating a multiproduct break-even point for a cafeteria that sells coffee, espresso, and hot chocolate. It assumes the sales mix of products will remain constant. It calculates the weighted average selling price and variable costs based on the mix. Applying the break-even formula with total fixed costs of €55,000 gives a break-even point of 19,784 units. To determine the break-even units of each product, it multiplies the total by the sales mix proportion for each.

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Susan Bvochora
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75 views2 pages

4 - Multiproduct Break-Even Point

This document discusses calculating a multiproduct break-even point for a cafeteria that sells coffee, espresso, and hot chocolate. It assumes the sales mix of products will remain constant. It calculates the weighted average selling price and variable costs based on the mix. Applying the break-even formula with total fixed costs of €55,000 gives a break-even point of 19,784 units. To determine the break-even units of each product, it multiplies the total by the sales mix proportion for each.

Uploaded by

Susan Bvochora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Break-Even Analysis Multiproduct Break-Even Point

4 Multiproduct Break-Even Point


When B.E.P. of a single product is calculated, sales price corresponds to the price of this product. However,
in reality firms sell many products. It is easily understood that when different products are offered by
a company, the estimation of the values of variables used in B.E.P. formula (sales price, variable costs)
becomes a complicated issue, since the weighted average of these variables has to be computed.

An important assumption in a multiproduct setting is that the sales mix of different products is known
and remains constant during the planning period. The sales mix is the ratio of the sales volume for the
various products. To illustrate, let’s look at Quick Coffee, a cafeteria that sells three types of hot drinks:
white/black coffee, espresso and hot chocolate.

The unit selling price for these three hot drinks are €3, €3.5 and €4 respectively. The owner of this
café wants to estimate its break-even point for next year. An important assumption we have to make
is that current sales mix will not change next year. In particular, 50% of total revenue is generated by
selling classic coffee, while espresso and hot chocolate corresponds to 30% and 20% of total revenues
respectively. At the same time, variable costs amount to €0.5 (white/black coffee), €0.6 (espresso) and
€0.7 (hot chocolate). We have to compute the weighted average for these two variables, selling price and
variable costs (Diagram 3):

PRODUCT PRICE (€) PROPORTIONAL TO TOTAL WEIGHTED


REVENUE AVERAGE

COFFEE 3.0 50%

ESPRESSO 3.5 30%

HOT CHOCOLATE 4.0 20% 3.35

PRODUCT VARIABLE COST (€) PROPORTIONAL TO WEIGHTED


TOTAL REVENUE AVERAGE

COFFEE 0.5 50%

ESPRESSO 0.6 30%

HOT CHOCOLATE 0.7 20% 0.57

Diagram 3: Weighted Average for some products

Applying the B.E.P. formula – company’s fixed costs are €55,000 – gives us 19,784 units.
B.E.P. = €55,000 / (€3.35 – €0.57) = 19,784 units.

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9
Break-Even Analysis Multiproduct Break-Even Point

This computation implies that Quick Coffee breaks even when it sells 19,784 hot drinks in total. To
determine how many units of each product it must sell to break even we multiply the break-even value
with the ratio of each product’s revenue to total revenues:

Classic Coffee: 19,784 × 50% = 9,892 units,


Espresso: 19,784 × 30% = 5,935 units and
Hot Chocolate: 19,784 × 20% = 3,957 units.

The above analysis can be used to answer a variety of planning questions. We can also vary the sales mix
to see what happens under alternative strategies.

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