Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income
if sales mix shifted from high contribution margin products to low contribution margin products. Such a shift would cause the average contribution margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus, net operating income would decline. With a lower contribution margin ratio, the break-even point would be higher because more sales would be required to cover the same amount of fixed costs.
In response to a request from your immediate supervisor, you have prepared a CVP graph portraying the cost and revenue characteristics of your company's product and operations. Explain how the lines on the graph and the break-even point would change if (a) the selling price per unit decreased, (b) fixed costs increased throughout the entire range of activity portrayed on the graph, (c) variable costs per unit increased.
(a) If the selling price decreased, then the total revenue line would rise less steeply, and the break-even point would occur at a higher unit volume. (b) If the fixed cost increased, then both the fixed cost line and the total cost line would shift upward and the break-even point would occur at a higher unit volume. (c) If the variable cost increased, then the total cost line would rise more steeply and the break-even point would occur at a higher unit volume.
In all respects, Company A and Company B are identical except that Company A's costs are mostly variable, whereas Company B's costs are mostly fixed. When sales increases, which company will tend to realize the greatest increase in profit? Explain.
All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin and in profits when sales increase.