This document provides information and examples about calculating break-even point for companies that produce multiple products. It defines weighted average selling price and variable expenses as the sales-weighted averages of individual product prices and expenses. Break-even point for multiple products is calculated as total fixed costs divided by weighted average contribution margin per unit. An example is provided to demonstrate calculating break-even point in both units and rupees for a company with three products. The document also discusses calculating an overall composite break-even point using total fixed costs divided by the composite profit/variable ratio.

1. 1
BREAK EVEN ANALYSIS III (BEP III)
Exercise: From the given information, calculate the following:-
Year 2009 2010
Sales (Rs in Lakh) 300 400
Profit (Rs in Lakh) 60 100
(a) P/V ratio.
(b) Fixed cost.
(c) Breakeven Sales.
(d) Sales to make a profit of Rs 200 lakh in 2011.
(e) Profit in 2011 if sales is dropped by 12.5% over 2009
Solution:
(a) P/V ratio = Change in Profit/Change in Sales = [100-60] x 100/[400-300] = 40%
(b) Fixed cost remains unchanged in both 2009 & 2010. So considering 2010,
Fixed cost = Sales x P/V ratio – Profit = 400 x 0.40 – 100 = Rs 60 lakh
(c) Breakeven sales = Fixed cost/P/V ratio = 60 lakhs/0.40 = Rs 150 lakh
(d) Actual Sales in 2011 = [Fixed cost + Desired profit]/P/V ratio = [60 lakh + 200 lakh]/0.40 = Rs
650 lakh
(e) Profit in 2011 = P/V ratio x 87.5% of sales in 2010 – Fixed cost = 0.40 x 350 lakh – 60 lakh = Rs
80 lakh
Break-even point at Multi-product case
A multi-product company can compute its break-even point using the following formula:
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 expenses.
Weighted Average Selling Price:
(Sale price of product A × Sales percentage of product A) + (Sale price of product B × Sale
percentage of product B) + (Sale price of product C × Sales percentage of product C) + …….so on
Weighted Average Variable Expenses:
(Variable expenses of product A × Sales % of product A) + (Variable expenses of product B × Sales %
of product B) + (Variable expenses of product C × Sales % of product C) + ……. So on
Weighted Average Contribution = Weighted Average Selling Price - Weighted Average Variable
Expenses
Break Even Point (Multi Product Case) = Total Fixed Cost / Weighted Average Contribution
Example: The PQR Company manufactures three products – product X, product Y and
product Z. The variable expenses and sales prices of all the products are given below:
Product X Product Y Product Z
Sales price per unit Rs 200 Rs 100 Rs 50
Variable cost per unit Rs 100 Rs 75 Rs 25
The total fixed expenses of the company are Rs 50,000 per month. For the coming month PQR
expects the sale of three products in the following ratio:
Product X: 20%; Product Y: 30%; Product Z: 50%
Compute the break-even point of PQR Company in units and rupees for the coming month.

2. 2
Solution:
PQR Company sells three products and is, therefore, a multi-product company. Its break-even point
can be computed by applying the above formula:
Break-even Point (in units) = Fixed Costs/Weighted Average Contribution Margin per Unit
= Rs 50,000 / (Rs 95* – Rs 55**) = Rs 50,000 / Rs 40 = 1,250 units
Therefore, the company will have to sell 1,250 units to reach break-even.
*Weighted average selling price:
= (Rs 200 × 20%) + (Rs 100 × 30%) + (Rs 50 × 50%) = Rs (40 + 30 + 25) = Rs 95
**Weighted average variable expenses:
= (Rs 100 × 20%) + (Rs 75 × 30%) + (Rs 25 × 50%) = Rs (20 + 22.50 + 12.50) = Rs 55
Now to Compute the Number Of Units Of Each Product To Be Sold:
Products No. of units
Product X (1,250 × 20%) 250
Product Y (1,250 × 30%) 375
Product Z (1,250 × 50%) 625
Total 1,250
Compute the Breakeven Point in Rupees as follows:
Product X (250 units × Rs 200) Rs 50,000
Product Y (375 units × Rs 100) Rs 37,500
Product Z (625 units × Rs 50) Rs 31,250
Break-even point in Rupee value Rs 118,750
The break-even point of PQR Company is Rs 118,750.
Check
Calculated BEP can be verified by preparing a contribution margin income statement as follows:
Sales (break-even point in dollars) Rs 118,750
Less variable expenses Rs 68,750*
Contribution margin Rs 50,000
Less fixed expenses Rs 50,000
Net operating income 0
*(250 units × Rs 100) + (375 units × Rs 75) + (625 units × Rs 25) = Rs 68,750
COMPOSITE BREAK EVEN POINT
In the case of companies producing more than one product, an overall or composite breakeven point
is calculated.
Composite Breakeven point = Total Fixed Costs/Composite P/V Ratio
Composite P/V Ratio = Total contribution x 100/Total Sales of all products
ASSIGNMENT
The following data have been obtained from the records of a manufacturing firm.
Period I Period II
Sales (Rs) 300000 320000
Total Cost (Rs) 260000 272000
Calculate
1. Break Even Sales
2. Profit when sales are Rs.360000.
3. Sales required to earn a profit of Rs.50000