Hi John. Thank so much for the useful lectures. On the graph with profit/sales towards the end of the lecture: units 500 sales why did you consider contribution and not the sales revenue? you said contribution is £2000 and fixed costs is £1000 so profit is £1000. Shouldn`t it be instead sales are £3000 (500 units*£6) minus £1000 fixed costs so profit is £2000? Thanks
Hi, just to clarify: I could see that you did the revenue as well later on I just wanted a clarification on terminology. If sales is used in a graph to interpret in the exam, is it going to be considered as contribution or revenue. Thanks
As you stated that the avg. CS ratio cannot be calculated by taking the average of individually calculated CS ratio of 3 products. However, in answer section of the page it is mentioned that “Alternatively, the average CS ratio may be calculated by taking the weighted average of the individual CS ratios, weighting by the budgeted sales revenues”. Apparently there seems to be contradiction in these two. Can you help me understand that please.
What I actually say is that you cannot take the ‘normal’ average (i.e. simply add up three of them and divide by 3).
Obviously you can take a weighted average, weighting by the sales revenue, and get exactly the same result because it is doing the same thing as I do in the lectures (but doing that normally takes longer).
Thanks John for your details explanation. But I do not understand when the question asking the breakeven of sales in selling three products, why do we need to consider the highest CS ration product instead of the other products?
It is always better to understand rather than just learn formulas 🙂
lungudanielaiulianasays
Hi, brilliant lecture as always. So effectively in a basic manufacturing business where sales made = units products (i.e. no closing inventory) the GROSS PROFIT is actually TOTAL CONTRIBUTION and OPERATING PROFIT is the $200 in Example 1 (i.e. the FIXED COSTS are Admin expenses) right? I’m just trying to understand how these would be reflected on Financial Statements
If the fixed costs are non-production costs, then what you have written is correct. However the fixed costs could be production costs and if this was the case then both the gross profit and the operating profit would be 200.
Thanks John for this brilliant presentation. However, from the graph, you used 500 units as the maximum output for the horizontal axis (x) instead of the budgeted sales and production of 300 units why? The same issue for the vertical axis (y) with a maximum value of $3,000 rather than $1,800 (300 x $6).Or was it done for illustrative purposes? Is it possible to read off contribution, variable cost and margin of safety from the graph? So the profit volume chart/graph can be drawn using the calculated BEP of 250 units and/or profit of $200 ((300 x $4 – $1,000 FC)
It was simply to end up with a reasonably sized graph – there are no ‘rules’ about this 🙂
But do appreciate that you cannot be asked to draw the graph yourself in the exam. However you must understand it because one could be drawn in the question itself and you could be expected to interpret it.
Marghe24 says
Hi John. Thank so much for the useful lectures. On the graph with profit/sales towards the end of the lecture: units 500 sales why did you consider contribution and not the sales revenue? you said contribution is £2000 and fixed costs is £1000 so profit is £1000. Shouldn`t it be instead sales are £3000 (500 units*£6) minus £1000 fixed costs so profit is £2000? Thanks
Marghe24 says
Hi, just to clarify: I could see that you did the revenue as well later on I just wanted a clarification on terminology. If sales is used in a graph to interpret in the exam, is it going to be considered as contribution or revenue. Thanks
kamran.khan says
Dear John,
As you stated that the avg. CS ratio cannot be calculated by taking the average of individually calculated CS ratio of 3 products. However, in answer section of the page it is mentioned that “Alternatively, the average CS ratio may be calculated by taking the weighted average of the
individual CS ratios, weighting by the budgeted sales revenues”. Apparently there seems to be contradiction in these two. Can you help me understand that please.
John Moffat says
What I actually say is that you cannot take the ‘normal’ average (i.e. simply add up three of them and divide by 3).
Obviously you can take a weighted average, weighting by the sales revenue, and get exactly the same result because it is doing the same thing as I do in the lectures (but doing that normally takes longer).
kamran.khan says
Sir, these formulas will also be given in exam? Break-even volume formula, margin of safety, C/s ratio etc.
John Moffat says
No. The only formulas that are given in the exam are those listed on the formula sheet in our free lecture notes.
lwhnatalie says
Thanks John for your details explanation. But I do not understand when the question asking the breakeven of sales in selling three products, why do we need to consider the highest CS ration product instead of the other products?
John Moffat says
Because doing the one with the highest CS ratio first will mean that the reach breakeven the fastest.
lwhnatalie says
oh got it, thanks John. 🙂
John Moffat says
Great 🙂
hermela says
thank u very much sir, also i dont get the point when u say that…. the C/S ratio is sometimes called the profit to volume (or P/V ratio)]
John Moffat says
It is simply a fact that the CS ratio is sometimes referred to as the PV ratio.
hermela says
sir thank u for ur time. what is the use of margin of safety use in reality and how can we evaluate and analyze it when we see its percenatge
John Moffat says
It is incredibly useful in reality. If it is small then there is a big risk of making a loss and a company might decide not to take the risk.
khalil.rahimi says
Hello sir,
You said whatever happens there is 1000 fixed cost but you draw a line for 2000 total cost in the graph, i am not getting it.
John Moffat says
The total cost is the fixed cost plus the variable costs.
Asif110 says
Thaaankyou for the formula logics !!! Grateful.
John Moffat says
You are welcome 🙂
rushdy says
Definetly!!!!! GOD IT MAKES SENSE.. I feel like I don’t want to use the formula.. I understand it now and feel better doing it the logical way.
John Moffat says
It is always better to understand rather than just learn formulas 🙂
lungudanielaiuliana says
Hi, brilliant lecture as always. So effectively in a basic manufacturing business where sales made = units products (i.e. no closing inventory) the GROSS PROFIT is actually TOTAL CONTRIBUTION and OPERATING PROFIT is the $200 in Example 1 (i.e. the FIXED COSTS are Admin expenses) right? I’m just trying to understand how these would be reflected on Financial Statements
John Moffat says
If the fixed costs are non-production costs, then what you have written is correct.
However the fixed costs could be production costs and if this was the case then both the gross profit and the operating profit would be 200.
kabwerichard says
Good refreshing lecture and as usual clear explanations.
John Moffat says
Thank you for your comment 🙂
alie2018 says
Thanks John for this brilliant presentation. However, from the graph, you used 500 units as the maximum output for the horizontal axis (x) instead of the budgeted sales and production of 300 units why? The same issue for the vertical axis (y) with a maximum value of $3,000 rather than $1,800 (300 x $6).Or was it done for illustrative purposes? Is it possible to read off contribution, variable cost and margin of safety from the graph? So the profit volume chart/graph can be drawn using the calculated BEP of 250 units and/or profit of $200 ((300 x $4 – $1,000 FC)
John Moffat says
It was simply to end up with a reasonably sized graph – there are no ‘rules’ about this 🙂
But do appreciate that you cannot be asked to draw the graph yourself in the exam. However you must understand it because one could be drawn in the question itself and you could be expected to interpret it.
alie2018 says
Okay Sir noted