Discussion:
Milagro Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit sales prices are product 1, $200; product 2, $150; and product 3, $100. The per unit variable costs to manufacture and sell these products are product 1, $150; product 2, $75; and product 3, $40. Their sales mix is reflected in a ratio of 6: 4: 2. Annual fixed costs shared by all three products are $5,400,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1 by $50, and product 2, by $25. However, the new material requires new equipment, which will increase annual fixed costs by $200,000.
Required
1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.
Analysis Component
3. What insight does this analysis offer management for long-term planning