Sheridan Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Sheridan incurs $7215000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%. The break-even point in dollars is

a. $18037500.
b. $19500000.
c. $2669550.
d. $16779070.

b. $19500000.

Explanation:

Break-even point is the level of sales on which business has no profit no loss situation. The business only covers the variable and fixed cost at this point.

Total Contribution can be determined by calculating adding estimated contribution of each division.

Total Contribution ratio = (65% x 30%) + (35% x 50%) = 19.5% + 17.5% = 37%

Fixed cost = $7,215,000

Break-even point = Fixed cost / Contribution margin ratio = $7,215,000 / 37% = $19,500,000

The break even in dollars is $19500000 and option B is the correct answer.

Explanation:

The break even point in dollars is the amount of revenue where total revenue equals total cost. It is the amount of revenue which produces no profit or no loss. The break even in dollars is calculated by dividing the fixed cost by the weighted average contribution margin ratio.

Break even in dollars = Fixed costs / Weighted average contribution margin ratio

Weighted average contribution margin ratio is the contribution margin ratio of each products multiplied by the products weight in the sales mix.

Weighted average contribution margin ratio = Weight in sales mix of Product A * contribution margin ratio of product A + Weight in sales mix of Product B * Contribution margin ratio of Product B

Weighted average contribution margin ratio = 0.65 * 0.3 + 0.35 * 0.5  = 0.37

Break even in dollars = 7215000 / 0.37

Break even in dollars = $19500000