Multiple Product BreakEven Analysis Joes Tax Service prepare

Multiple Product Break-Even Analysis

Joe\'s Tax Service prepares tax returns for low-to middle-income taxpayers. Its service operates January 2 through April 15 at a counter in a local grocery store. All jobs are classified into one of three categories: standard, multiform, and complex. Following is information for last year. Also, last year, the fixed cost of rent, utilities, and so forth were $55,000.

Required
(a.) Determine Joe\'s break-even dollar sales volume.

Round contribution margin to three decimal places.

Round break-even sales volume to the nearest dollar.

Product

Weighted

Selling Price

Weighted

Contribution

Margin

(b.) Determine Joe\'s margin of safety in sales dollars.

Round answer to the nearest dollar.
$Answer

			Standard	Multiform	Complex
Billing rate			$55	$130	$255
Average variable costs			(30)	(75)	(150)
Average contribution margin			$25	$55	$105
Number of returns prepared			1,750	500	250

Solution

(a.) Break even Sales (Volume) - Sales volume at which there is no profit no loss for a company is called break even point. To achieve break even, company\'s contribution margin should be equal to fixed costs of the company.

Break even sales (Volume) = Fixed costs / Contribution margin per unit

Following will be the solution:

Product

Weighted Selling Price

Weighted Contribution Margin

Standard

1750 (returns) * $55 =$96250

1750 (returns) * $25 =$96250

Multiform

500 (returns) * $130 = $65000

500 (returns) * $55 = $65000

Complex

250 (returns) * $255 = $63750

250 (returns) * $105 = $63750

Total

$225,000

$97500

Contribution Margin ratio :

(Weighted Contribution Margin/Weighted total sales)

$97500/$225,000 = 43.333%

Break even sales Volume

Fixed Cost /Contribution per unit

$55000/$39* = 1410 returns

Note : *Contribution per Unit = $97500/2500 (returns) = $39/ return

Sales per unit = $225,000/2500 (returns) = $100/return ( will be used for b. part of the answer)

You can cross verify answer in following way:

Consider 1410 returns are divided in Standard, multiform & complex product in the same ratio of 1750:500:250

You will get Standard, multiform & complex returns as 987, 282, 141 respectively. by multiplying each type of returns with respective contribution margin you will get total contribution of $55000. Our contribution margin & fixed costs are same and hence you will reach break even point.

(b.) Margin of safety = Sales that can be lost before company starts to make losses

= (Total Sales volume - Breakeven Sales volume)* Selling price

= $225,000 - (1410 * 90)

= $98077

You can cross check this answer as following:

Your Contribution margin on sale of $225,000 is $97500

If you lose sales of $98077, you will lose Contribution margin of (98077*43.333%) $42500

Fixed costs are $55,000

Hence, beyond this point company will start to make losses

Hope you get your answer

Feel free to ask for any clarification

Happy Chegging

Product	Weighted Selling Price	Weighted Contribution Margin
Standard	1750 (returns) * $55 =$96250	1750 (returns) * $25 =$96250
Multiform	500 (returns) * $130 = $65000	500 (returns) * $55 = $65000
Complex	250 (returns) * $255 = $63750	250 (returns) * $105 = $63750
Total	$225,000	$97500
Contribution Margin ratio :	(Weighted Contribution Margin/Weighted total sales)	$97500/$225,000 = 43.333%
Break even sales Volume	Fixed Cost /Contribution per unit	$55000/$39* = 1410 returns