Composite unit

Definition

Composite unit is a theoretical bundle of different products, combined in fixed proportions, used to simplify break-even and other cost-volume-profit analyses. It helps in understanding the overall profitability and sales mix in a multi-product environment.

5 Must Know Facts For Your Next Test

1. The composite unit allows businesses to calculate a single break-even point for multiple products.
2. To create a composite unit, each product's contribution margin must be known.
3. A change in the sales mix will affect the composite unit's average contribution margin.
4. Composite units are useful for sensitivity analysis under varying business conditions.
5. They simplify complex calculations associated with multi-product environments.

Review Questions

• What is the primary purpose of using a composite unit in cost-volume-profit analysis?
• How does a change in the sales mix impact the composite unit?
• What key information is needed to construct a composite unit?

Related terms

Break-Even Point: The level of sales at which total revenues equal total costs, resulting in zero profit.

Contribution Margin: The amount remaining from sales revenue after variable expenses have been deducted.

Sales Mix: The ratio of different products sold by a company; impacts overall profitability.