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.

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