What is a Composite Unit?

//What is a Composite Unit?
What is a Composite Unit? 2017-10-01T08:07:09+00:00

Definition: A composite unit is a set of different products grouped together in proportion to their sales mix. In other words, its’ a way to categorize and group products from different business segments together in an effect to manage sales, inventory levels, and break even points. You can think of one sales mix as a composite unit.

What does Composite Unit Mean?

Composite units are often used by cost accountants to measure the break-even point of multiple products, departments, and even the company as a whole. Since the composite unit can be used to estimate the total number of product sales, it can also be used in the budgeting process. Let’s take a look at an example.

Example

Tammy’s bicycle shop sells three different types of bikes: road, BMX, and mountain bikes. According to Tammy’s sales mix, she sells one road bike for every two mountain bikes and three BMX bikes. In other words, her sales mix is 3:2:1. Thus Tammy’s composite unit would be six products: 3 BMX, 2 mountain, and 1 road bike.

Using this composite unit, Tammy can calculate the break-even point of her sales across all the business segments. Let’s assume Tammy sells the BMX bike for $100, the mountain bike for $75, and the road bike for $50. Her selling price per unit would be $500.

Tammy’s total variable costs per product are $15 for the BMX, $10 for the mountain bike, and $5 for the road bike. The total fixed costs are $5,000. Using the break-even point per composite unit formula, we can calculate how much Tammy will need to sell of each unit in order to breakeven.

Tammy will need to sell 12 composite units to cover her fixed and variable costs. This means she will need to sell 36 BMX bikes, 24 mountain bikes, and 12 road bikes before her costs are recovered.