If you are making a product, you will need to know the cost of all the components that go into that product. Variable costs are those costs associated with making the product or buying it wholesale. Determine variable unit costs: Determine the variable costs of producing one unit of this product.It should be noted that as the business can’t sell a part of a product, the number of units is always rounded up. The break even units can now be split between the two products using the unit sales mix percentages as follows: Step 3: Analyse the Break Even Units by Product Weighted average contribution margin = 2.20īreak even units = Operating expenses / Unit contribution margin The break even units are calculated as before except this time we use the weighted average contribution margin. WACM = Product A contribution x Product A sales mix % + Product B contribution x Product B sales mix %įor these products, with a sales mix of 90%/10%, the weighted average contribution for every unit sold is 2.20 as shown in the diagram below. Product B unit contribution margin = 20.00 - 7.00 = 13.00Īs the unit sales mix is 90% product A to 10% product B, the weighted average contribution margin (WACM) per unit is calculated using the sales mix formula as follows: Product A unit contribution margin = 5.00 - 4.00 = 1.00
Because we now have two products, we need to find the average contribution margin of both products, however, because the products are not sold in equal numbers of units, we need to weight the contribution margin by the sales mix as follows: In the single product example we used the contribution margin of the product to work out the break even units.
The break even analysis for multiple products is carried out using the following steps: Step 1: Calculate the Weighted Average Contribution Margin In addition, our financial projections show that our unit sales mix is 90% / 10%, meaning that 90% of our unit sales will be product A, and 10% will be product B. Product A is our low margin product with a selling price of 5.00 and a cost price of 4.00, and product B is our high margin product with a selling price of 20.00 and a cost price of 7.00. Suppose for example, our business has the same operating expenses of 4,500, but this time is has two product lines. In order to carry out a break even analysis for multiple product lines. Break Even Analysis for Multiple Products However, most businesses sell more than one product, and the calculation of the break even units needs to be amended to reflect this.
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