COST AND MANAGEMENT Unit 2, section 6: Multi-productBREAK

MULTI-PRODUCT break-even analysis

EVEN approachesAPPROACHES
ANALYSIS to break-even
UNIT 2 SECTION
ACCOUNTING 6
analysisTO BREAK-EVEN ANALYSIS

The method of calculating break-even point of a single product company

has been discussed in Section Five. In this Section, we will look at how to
calculate break-even point of a multi-product company. A multi-product
company means a company that sells two or more products. Never forget
our earlier assumption: there is a constant sales mix!

By the end of this Section, you should be able to:

 make break-even analysis of multi-product firms.
 work practical examples using multiple products.

Formula for multiple products break-even analysis:

A multi-product company can compute its break-even point using the
following formula:

Break-even point =

For computing break-even point of a company with two or more products,

we must know the sales percentage of individual products in the total sales
mix. This information is used in computing weighted average selling price
and weighted average variable costs.

In the above formula, the weighted average selling price is worked out as
follows:

(Sale price of product A × Sales percentage of product A) + (Sale price of

product B × Sale percentage of product B) … and the weighted average
variable costs are worked out as follows:
(Variable expenses of product A × Sales percentage of product A) +
(Variable expenses of product B × Variable expenses of product B)...

When weighted average variable expenses per unit are subtracted from the
weighted average selling price per unit, we get weighted average
contribution margin per unit. Therefore, the above formula can also be
written as follows:

Break-even point =

An example would be very helpful to understand the whole procedure.

Consider the following example of a multi-product company:

Example 6.1
Ekumfiman Company manufactures three products – product X, product Y
and product Z. The variable expenses and sales prices of all the products are
given below:

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 Unit 2, section 6: Multi-product break-even analysis approaches to break-even COST AND MANAGEMENT
analysis ACCOUNTING

Product X Product Y Product Z

Sales price per unit GHS200 GHS100 GHS50
Variable cost per unit GHS100 GHS75 GHS25

The total fixed expenses of the company are GHS50,000 per month. For the
coming month, Ekumfiman expects the sale of three products in the
following ratio:
Product X: 20%;
Product Y: 30%;
Product Z: 50%

Required: Compute the break-even point of Ekumfiman Company in units

and Cedis for the coming month.

Solution 6.1
Break-even point =

Weighted average selling price:

= (GHS200 × 20%) + (GHS100 × 30%) + (GHS50 × 50%)
= GHS40 + GHS30 + GHS25
= GHS95
Weighted average variable expenses:
= (GHS100 × 20%) + (GHS75 × 30%) + (GHS25 × 50%)
= GHS20 + 22.50 + 12.50
= GHS55
Break-even point = GHS50,000 / GHS95 – GHS55
= GHS50,000 / GHS40
= 1,250 units
The company will have to sell 1,250 units (of all three products) to break-
even. Now let’s compute the number of units of each product to be sold: this
is done by multiplying the break-even quantity by each product’s sales
percentage or ratio.

Products No. of units

Product X (1,250 × 20%) 250
Product Y (1,250 × 30%) 375
Product Z (1,250 × 50%) 625
———

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COST AND MANAGEMENT Unit 2, section 6: Multi-product break-even analysis approaches to break-even
ACCOUNTING analysis

Total 1,250
———

As the number of units of each individual product to be sold have been

computed, we can now compute the breakeven point in Cedis as follows:
units of each product times the selling price of that product.

Product X (250 units × GHS200) GHS50,000

Product Y (375 units × GHS100) GHS37,500
Product Z (625 units × GHS50) GHS31,250
————
Break-even point in Cedis GHS118,750
————
The break-even point of Ekumfiman Company is GHS118,750. It can be
verified by preparing a contribution margin income statement as follows:

Sales (break-even point in cedis) GHS118,750

Less variable expenses** GHS68,750
————
Contribution margin 50,000
Less fixed Costs 50,000
————
Net Profit 0
————

**Variable expenses
Product X (250 units × GHS100)
Product Y (375 units × GHS75)
Product Z (625 units × GHS25)

Bravo! You made it to the end of the last Section of Unit 2!

In this Section, you have learnt about multi-product analysis break-even. By
now you should be able to calculate the break-even point for a multi-product
firm. We hope you had an interesting study.
Now get prepared for the next Unit (Unit 3).

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