Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit sales prices are product 1, $ 40; product 2, $ 30; and product 3, $ 20. The per unit variable costs to manufacture and sell these products are product 1, $ 30; product 2, $ 15; and product 3, $ 8. Their sales mix is reflected in a ratio of 6:4:2. Annual fixed costs shared by all three products are $ 270,000. 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 $ 10, and product 2, by $ 5. However, the new material requires new equipment, which will increase annual fixed costs by $ 50,000.
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.
3. What insight does this analysis offer management for long- term planning?