otal variable costs (TVC) are the total costs that change with the level of activity. Unit variable costs (UVC) are the variable costs per unit of activity.
As the level of activity increases, TVC and UVC also increase. This is because it takes more resources (e.g., labor, materials) to produce more units.
Total fixed costs and unit fixed costs
Total fixed costs (TFC) are the total costs that do not change with the level of activity. Unit fixed costs (UFC) are the fixed costs per unit of activity.
As the level of activity increases, UFC decreases. This is because the fixed costs are spread over more units.
How the sales mix affects the computation of the break-even point
The sales mix is the proportion of different products or services that a company sells. The break-even point is the level of activity at which a company’s total revenue equals its total costs.
The sales mix can affect the break-even point because different products or services may have different profit margins. For example, a company may sell two products: Product A has a high profit margin and Product B has a low profit margin. If the company sells more of Product B, the break-even point will increase because it will take more sales to cover the fixed costs.
Example:
A company produces two products, Product A and Product B. The company’s fixed costs are $100,000 per month. The variable costs for Product A are $2 per unit and the variable costs for Product B are $1 per unit. The selling prices for Product A and Product B are $5 and $3 per unit, respectively.
The company’s break-even point will vary depending on the sales mix. If the company sells only Product A, the break-even point will be 20,000 units. This is because the company needs to sell 20,000 units of Product A to generate enough revenue to cover its fixed costs.
If the company sells only Product B, the break-even point will be 33,333 units. This is because the company needs to sell 33,333 units of Product B to generate enough revenue to cover its fixed costs.
If the company sells a mix of Product A and Product B, the break-even point will be somewhere in between 20,000 and 33,333 units. The exact break-even point will depend on the proportion of Product A and Product B that the company sells.
Conclusion
Total variable costs and unit variable costs increase as the level of activity increases. Total fixed costs remain the same regardless of the level of activity, while unit fixed costs decrease as the level of activity increases.
The sales mix can affect the break-even point because different products or services may have different profit margins. A company with a higher proportion of high-profit margin products will have a lower break-even point than a company with a higher proportion of low-profit margin products.
