Hello dear john I’v watched your lecture but i couldnt understand the logic of why do we calculate the avarage c/s ratio in this way and why we cant calculate its avarage in a normal way(sum of three ratios divided by three). Would you please clarify this matter for me in an example 馃檪

You can only ever take average by adding up and dividing by 3 if they all have the same chance of occurring.

Imagine you had 5 balls in a bag – one weighs 10 grams and the other four weigh 100 grams each. What is the average weight? You cannot saying it is (10+100)/2 = 55 grams!!! It is the same idea here.

Sir i am a bit confused. Because of selling p first Did the break even of company changed from 26434 to 21108 or it is just that break even of 26434 is achieved earlier ?

If the company sell P only the profit would be $23,800. If both P and C are sold then the cumulative profit would be $29,800. The profit of the company is maximized at $33,400 by producing all three products.

Thanks John. It is sensible enough to first sell P regardless of the fact that its C/S ratio is above the WACS ratio because P is generating the highest contribution per unit and in total in terms of sales revenue which is sufficient to cover fixed costs of $8,000 compare with C and V. The products are plotted individually on the graph with P first then followed by C and V. Selling P first will result in earlier breakeven at lower level of output than the normal breakeven point.

sir, so basically, we know that selling p first helps us achieve breakeven more quickly because, p has the highest cs ratio. is it also because if we sell p, we make a profit after deducting the fixed costs as well? (since we are making profit, we know that breakeven is is already achieved)

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cinaa2 says

Hello dear john

I’v watched your lecture but i couldnt understand the logic of why do we calculate the avarage c/s ratio in this way and why we cant calculate its avarage in a normal way(sum of three ratios divided by three).

Would you please clarify this matter for me in an example 馃檪

John Moffat says

You can only ever take average by adding up and dividing by 3 if they all have the same chance of occurring.

Imagine you had 5 balls in a bag – one weighs 10 grams and the other four weigh 100 grams each. What is the average weight? You cannot saying it is (10+100)/2 = 55 grams!!!

It is the same idea here.

cinaa2 says

Thanks dear john…

hammadmarfani says

Sir i am a bit confused. Because of selling p first Did the break even of company changed from 26434 to 21108 or it is just that break even of 26434 is achieved earlier ?

John Moffat says

Breakeven occurs earlier – check the graph again 馃檪

alie2018 says

If the company sell P only the profit would be $23,800. If both P and C are sold then the cumulative profit would be $29,800. The profit of the company is maximized at $33,400 by producing all three products.

John Moffat says

True (although remember that the main object of the exercise is to find breakeven).

alie2018 says

Thanks John. It is sensible enough to first sell P regardless of the fact that its C/S ratio is above the WACS ratio because P is generating the highest contribution per unit and in total in terms of sales revenue which is sufficient to cover fixed costs of $8,000 compare with C and V. The products are plotted individually on the graph with P first then followed by C and V. Selling P first will result in earlier breakeven at lower level of output than the normal breakeven point.

jareerabedin says

sir,

so basically, we know that selling p first helps us achieve breakeven more quickly because, p has the highest cs ratio.

is it also because if we sell p, we make a profit after deducting the fixed costs as well? (since we are making profit, we know that breakeven is is already achieved)

John Moffat says

Correct 馃檪