Question:
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit sales prices are red, $74; white, $108; and blue, $99. The per unit variable costs to manufacture and sell these products are red, $48; white, $75; and blue, $90. Their sales mix is reflected in a ratio of 5:4:2 (red: white: blue). Annual fixed costs shared by all three products are $179,200. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by $10; white, by $16; and blue, by $13. However, the new material requires new equipment, which will increase annual fixed costs by $22,400. (Round answers to whole composite units.)
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?