Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $10 and product 2 by $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product. (Round to the next whole unit.) What insight does this analysis offer management for long-term planning? Please explain your work in detail and provide in-text citations. At least 5 references are required among which one should be the textbook as source of the data. Include the initial situation and initial assumptions in your answer.

c. Management should start using the new material as soon as possible since it doesn't only decrease the break even point, if sales level remain the same, it will increase operating profits.

Explanation:

product 1's contribution margin = $10

product 2's contribution margin = $15

product 3's contribution margin = $12

sales mix = 6:4:2

weighted contribution margin = ($10 x 6/12) + ($15 x 4/12) + ($12 x 2/12) = $5 + $5 + $2 = $12

new contribution margin:

product 1's contribution margin = $20

product 2's contribution margin = $20

product 3's contribution margin = $12

sales mix = 6:4:2

weighted contribution margin = ($20 x 6/12) + ($20 x 4/12) + ($12 x 2/12) = $10 + $6.67 + $2 = $18.67

JackelineCasarez JackelineCasarez · Answer 2 · 2022-03-30T10:47:34+02:00

The answers to the given questions are as follows:

a). $ 7.50,000

b). $571,240

c). The management should employ new material immediately.

Find the total sales

a). Given that,

Number of break-even units = Annual fixed cost/number of months

= $270,000/12

= $ 22,500

Now, we will find the units of all three products to determine the total sales.

No. of units of product 1 = 22,500 x 6/12

= 11,250 units

No. of units of product 2 = 22,500 x 4/12

= 7,500 units

No. of units of product 3 = 22,500 x 2/12

= 3,750 units

We have the prices of products 1, 2, and 3 as $40, $30, and $20 respectively.

Using this,

We can find the total sales = 11,250 × $40 + 7,500 × $30 + 3,750 × $20

= 4,50,000 + 2,25,000 + 75000

= $ 7,50,000

b). Similarly,

Given that,

Number of break-even units = Annual fixed cost/new contribution margin

= $320,000 / $18.67

= 17,139.8 units

Now, we will find the units of all three products to determine the total sales.

No. of units of product 1 = 17,139.8 units x 6/12

= 8,567 units

No. of units of product 2 = 17,139.8 units x 4/12

= 5,714 units

No. of units of product 3 = 17,139.8 units x 2/12

= 2,857 units

We have the prices of products 1, 2, and 3 as $40, $30, and $20 respectively.

Using this,

We can find the total sales = 8,567 × $40 + 5,714 × $30 + 2,857 × $20

= $342,680 + $171,420 + $57,140

= $571,240

C). The firm is required to employ the new material with immediate response for increasing profit and decreasing break-even points.

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