Definition
A composite unit is a hypothetical measurement that combines products in a sales mix according to their proportion of sales. In other words, it allows for different products to be grouped together for comparison purposes. A composite unit is basically an expression of the sales mix.
What Does Composite Unit Mean?
Using composite units allows business leaders and accountants to create budgets, make appropriate sales management changes, and engage in accurate inventory monitoring. It is also commonly used for performing breakeven analyses across different product lines or across the business as a whole. Breakeven analyses for individual product lines can be performed separately, but composite units can give a bird’s-eye view of what sales targets should be. By using composite units, businesses can quickly get an idea of how many units need to be sold across the business in order to cover fixed and variable costs.
Let’s look at an example.
Example
Ashley is the store manager of a boutique in New York City. She is interested in learning more about blouse sales in the store. She has determined that for every one blue blouse, she sells three red blouses and four green blouses. This makes her sales mix 4:3:1. What is the composite unit for Ashley’s boutique?
Ashley’s composite unit is eight. This unit is calculated by simply adding together the three parts of the sales mix ratio. What can Ashley do with this number? First, she will need to determine her fixed costs, variable costs, and selling price per unit. She can use this information to determine the breakeven point in composite units for blouses. Once Ashley has the breakeven composite units, she can multiply this number by each portion of the ratio to determine how many units of each color blouse she would need to sell in order to break even.
