I spotted an error in In the lecture note answers (page 106) for calculating the CS ratio - for product P it says the sale price is $6 however in the question it's $7. It correct shows 0.379 though.
R
roastedgrilledcheese·
Sir, I understood the BEP revenue using P's C:S Ratio for $21.132 (8000/0.379) but I don't understand where does $23.400 comes from sir. I got $26345 instead from (8000/0.18). 18.18% is from (1.25*4800+0.75*4800)/(5*4800+6*4800).
S
stanleyz·
How do we compute break even sales volume (units) for the 3 products ?
J
John MoffatTutor·
It depends whether the mix of the products is to remain the same or whether they can produce the one with the highest CS ration first (as explained in the lectures).
Once we know the breakeven revenue from each product then dividing by the selling price gives the number of units.
M
Muhammad Ameerul Afnan·
Hello,
Just want to confirm, initially we get breakeven revenue at 26,402
At the end of the lecture, why suddenly our breakeven revenue change to 23,400? When we want to see if it is close to new breakeven which is 21,108.
Is it a typo in the lecture of did i missed any calculation?
Thanks!
S
Sunny·
I think the misunderstanding is due to a language barrier, as per the narrative, we are to assume that sales & profits are cumulative therefore we would first sell Product P until we reached the breakeven revenue mark. We would therefore no longer need to factor in the C/S ratio of the other products.
Which is why the C/S ratio used is 0.379 i.e. (31,800/84,000) and how we worked out that the breakeven revenue would be 21,108 (i.e. 8000/0.379).
As we did not assume on the basis of cumulative figures, we had previously used an average C/S ratio in part (c) i.e it was assumed the company would sell a mix of Products P, C, and V until we reached breakeven revenue which is why the revenue figures differ from part (c) and part (f)
C
custard1·
Dear Sir, Quiz question number 1, chapter 8 Cost Volume Profit . Selling price per unit is 28/70%. Please can you explain calculation for 70%? thank you
J
John MoffatTutor·
The CS ratio is 30%. Given that the contribution is the selling price less the variable costs, then for every $100 the contribution is $30 and the variable costs must be $70, or 70% of the selling price.
If the variable cost is $28 and this is 70% of the sales, it means that the selling price must be 28/70%.
M
Mohammed·
Hello Sir,
In the above question we after calculating breakeven revenue = total fixed costs/ Weighted average CS ratio
which gives the answer $26,402.
my doubt is if after finding breakeven revenue we are asked to find breakeven units for each of the three products.
How do we do it?
J
John MoffatTutor·
It is because it is breakeven revenue that we are after.
S
Sohan·
Thanks a ton!
N
nethra·
Sir, what will be the sales unit at which the revenue will be zero?
J
John MoffatTutor·
Zero!! Zero revenue means that they are not selling anything!!
S
Sohan·
Respected Sir,
in multi-product cvp analysis, when we're trying to figure out the effects of selling products in preference to each other, we rank them according to their C/S ratios and not the contributions they've generated. Why is that the case?
For example, if there are three products
X whose contribution p.u. = $8 , C/S ratio =0.45,
Y's cont. p.u.=$6 , C/S ratio=0.5 and
Z whose cont.p.u,=$3 , C/S ratio=0.33
why shoudn't we produce X first? It generates the highest contribution per unit, so selling it first should make us reach the breakeven point even quicker and the if we ramp up its sales then we'll be more profitable.
But as the rule goes, we should produce Y first then X because it has the highest C/S ratio.
H
Hassan·
In Cost-Volume-Profit (CVP) analysis, the Contribution Margin (CM) is often used to assess the profitability of individual products, but in situations where you need to rank products or prioritize them, a Contribution-to-Sales (C/S) ratio can be more useful. Here’s why:
1. **Standardizing Profitability Across Products**: The C/S ratio expresses the contribution margin as a percentage of sales, providing a standardized way to compare products of different price points and volumes. This allows for easier ranking of products regardless of their size or sales volume. The contribution margin alone may not show the relative profitability in the context of varying product prices.
2. **Indicates Efficiency**: The C/S ratio helps assess how much of each dollar of sales contributes to covering fixed costs and generating profit. A higher C/S ratio means a product is more efficient at contributing to profit relative to its sales price, which is especially useful when prioritizing limited resources or deciding which products to emphasize in a portfolio.
3. **Helps Prioritize Sales Efforts**: By using the C/S ratio, you can identify which products are most profitable relative to their sales. Products with higher C/S ratios should be given more attention in marketing and sales efforts, as they contribute more to covering fixed costs and driving profits per unit sold.
In contrast, the contribution margin alone (without considering sales) might not fully reflect the importance of higher-selling items, even if their contribution margin is lower. The C/S ratio provides a better overall understanding when comparing profitability across diverse products.
J
JojoBeat·
Hey Sir,
In the last lecture, you mentioned breakeven revenue = contribution/cs ratio, however in this lecture you said breakeven revenue = fixed cost/cs ratio. Which one is right?
J
John MoffatTutor·
I do not say that the breakeven revenue = contribution/CS ratio. What I do say is that the breakeven revenue = breakeven contribution / CS ratio (because, of course, the revenue is always equal to the contribution / CS ratio.
Given that for break even the contribution is equal to the fixed costs, then the breakeven revenue = breakeven contribution / CS ratio = fixed costs / CS ratio.
N
Natalie·
When going through the CS ratio (contribution / sales), sir only mention revenue = contribution / CS ratio instead of breakeven revenue.
Can we say that if the contribution is breakeven, then the fixed overhead cost can also be covered?
J
John MoffatTutor·
By definition the breakeven contribution is equal to the fixed costs.
A
Asif·
Greetings sir. Hope you are in good health.
Sir, may I inquire, what would happen if it took the sales of both P and C to achieve breakeven. How then would you calculate the new breakeven ?
J
John MoffatTutor·
There would be no point. Always we want to breakeven as soon as possible. If they have to be produced in the same ratio then we use the average CS ratio. If they do not have to be produced in the same ratio we produce in the order of their CS ratios.
A
Asif·
Let me clarify further. The arrow you directed at 27:44. Suppose it does not take only P, but both P & C to achieve that new breakeven came about due to prioritizing sale as per c/s ratio. Then how would we calculate this new breakeven point ?
J
John MoffatTutor·
Then you would apportion between the two linearly.
B
blesson·
what are the benefits of breakeven earlier?
J
John MoffatTutor·
All future predictions are just that - estimates, and might not happen. The sooner something appears to breakeven then the more certain we are that it will actually end up being profitable.
M
mehdi·
thanks for being amazing:)
J
John MoffatTutor·
Thank you for your comment :-)
S
shakir7385·
Hi John,
In Notes, it is written that "the C/S ratio is sometimes called the profit volume (or P/V ratio)." I am facing difficulty in understanding it since the profit will be arrived after deduction of fixed cost. And in case of significantly higher fixed cost, may be we don't get any profit. Despite that contribution turned out to be higher in that case. Can you please help me understanding this
J
John MoffatTutor·
That is why PV ratio is a bad name for it - it doesn't use the profit but used the contribution.
D
daisy·
hi, please with example 6d how did you get the sales revenue of 150,000 for the pv chart. thank you
A
ABDULLAHI·
Hi john. thanks for the amazing lecture. was wondering if this is true always;
1) the product with highest CS ratio guarantee earlier profitability in the short term. therefore its favorable to sell individual products than selling all 3 randomly or jointly.
2) That any product that give a return that is enough to compensate the fixed cost earlier should always be sold first, inevitably that means the product has higher CS ratio.
3) When selling the three products together and when selling one after the other, the line of the two are parallel(in the pv chart).
thanks.
J
John MoffatTutor·
The first two points are true.
I am maybe misunderstanding what you have written in your third point, but although both charts would end in the same place, the lines are not parallel. When they products are sold one after the other, the line for each product has a different angle.
A
ABDULLAHI·
Thanks sir. in the third point i was asking the cumulative revenue-profit chart you plotted at the end look parallel to the charts you constructed in part D of example 6. will the cumulative graph be parallel(because of earlier breakeven) or a curve since both end at the same figure(136800,33400).
J
John MoffatTutor·
They are all straight lines, not curves, but they are not parallel to each other.
I
Ibrahim·
Hello John sir,
How are you?
I hope you are doing well,
Thank you sir for your appreciated time actually I do appreciate your effort please sir, could you calculate the breakeven in units first and what's the selling price that we have to multiple to get breakeven revenues for example "6"?
Could you clarify by using numbers?
J
John MoffatTutor·
I don't understand what you are asking, because I work through the whole example in the lectures and the selling prices are given in the question.
N
Nader·
as i understand he wants first to calculate break even units by:
(fixed cost/ (total contribution/total product unit))=(8000/(41400/21600))=4173.913 unit
then
revenue per unit= total revenue/ total unit= 136800/21600= 6.333
finally
break even revenue= break even unit* revenue per unit= 6.333*4173.913=26434.78
E
ellesouth16·
Sir! Regarding break even revenue, in the last chapter you used contribution over C/S to get the sales. Does this mean in multi-product CVP analysis, we will be using Fixed cost over C/S to get the sales?
E
ellesouth16·
is it because total contribution is equals to fixed cost?
J
John MoffatTutor·
Yes, it is because at breakeven the total contribution is equal to the fixed costs :-)
E
ellesouth16·
Thank you so much! Sir.
J
John MoffatTutor·
You are welcome :-)
K
kuaijishi·
Dear John,
I am particularly having issues with my final answer. I am always rounding off either too early or too late. For example BE (revenue) = $26 402 but I got $26437 ($8000/0.3026). I’m scared I will be penalized heavily in Section A and B which are corrected by the computer as either right or wrong. Do you have any suggestions for me. I thank you in advance.
J
John MoffatTutor·
For most questions where there can be rounding problems, then either you are asked to type your answer to (say) the nearest $1,000 or the nearest $100, or otherwise the computer is programmed to accept a range of answers. So rounding is unlikely to be a problem :-)
L
lucytan·
Dear John How Do you arrive at the break-even figure 23400?
J
John MoffatTutor·
Which part are you referring to? If you are looking at example 6 part (c), then the breakeven sales revenue is $26,400 (not $23,400) and is the fixed overheads of 8,000 divided by the CS ratio of 0.303
F
Francisco·
I think Lucytan refers to a potential typo on the graph on minute 23:38.
R
robynm·
Hi John,
I am confused about Example 6 (c). You have calculated the Breakeven Revenue using the Breakeven Volume formula, which in the previous lecture was used to calculate the amount of units needed to breakeven. This was then multiplied by the selling price to give us the Breakeven Revenue.
In this lecture you have used the formula to calculate the Breakeven Revenue without multiplying by the average selling price. Should the 26,402 calculated have been units which were then multiplied to give us the Revenue or is there reason how we were able to Revenue from this from the formula - and if so how are we able to differentiate whether our answer should be in units or $.
Thanks
R
robynm·
Hi,
I have realised that we divided the by the C/S Ratio in this example and not the contribution/unit and that is why we are able to get the Revenue.
Thanks
J
John MoffatTutor·
I am glad that you are clear now :-)
S
Saksham·
Hello Mr John, Can you please elaborate why breakeven sales revenue for P is curve.
Thankyou.
J
John MoffatTutor·
It isn't a curve!!! :-)
I can only assume that you are referring to the PV charts, in which case the graph is of the profit and is a straight line for each of P, C and V separately.
Did you watch the earlier lecture on CVP analysis first?
M
mabafor·
Dear John,
The graph on page 98 of the notes started the profit column as (10,000) but you have (8,000) being fixed cost in the question and in the video. Please is this a mistake? If not how did you arrive at the (10,000) on the horizontal axis?
Additionally, the scaling e.g P is sale 84,000 and profit of 23,800. I don't understand how you arrived at the scaling in the graph answer on the notes, although the video did not put in the scaling. The calculation is clear, but I don't understand the graph scaling in the notes please.
Thank you.
Thank you.
J
John MoffatTutor·
The graph should show the fixed cost as 8,000, not 10,000. The lecture is correct - it is just a typing mistake in the notes.
With regard to the scaling, you can use any scaling you want. Since the maximum total revenue is 136,800 and the corresponding cumulative profit is 33,400, then it makes sense to have the axes going up to these amounts. I just made them go up to the 10,000 above in each case.
(Obviously this is not a problem in the exam because you cannot be expected to draw the graph. You can be tested that you understand it, but in that case the graph would be already given to you in the exam.)
R
Rufus·
Hi Mr John,can you explain how break-even revenue is fixed costs/cs ratio.
S
Sina·
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 :)
J
John MoffatTutor·
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.
S
Sina·
Thanks dear john...
H
Hammad·
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 ?
J
John MoffatTutor·
Breakeven occurs earlier - check the graph again :-)
A
alie2018·
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.
J
John MoffatTutor·
True (although remember that the main object of the exercise is to find breakeven).
A
alie2018·
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.
A
Avery·
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)
Once we know the breakeven revenue from each product then dividing by the selling price gives the number of units.
Just want to confirm, initially we get breakeven revenue at 26,402
At the end of the lecture, why suddenly our breakeven revenue change to 23,400? When we want to see if it is close to new breakeven which is 21,108.
Is it a typo in the lecture of did i missed any calculation?
Thanks!
Which is why the C/S ratio used is 0.379 i.e. (31,800/84,000) and how we worked out that the breakeven revenue would be 21,108 (i.e. 8000/0.379).
As we did not assume on the basis of cumulative figures, we had previously used an average C/S ratio in part (c) i.e it was assumed the company would sell a mix of Products P, C, and V until we reached breakeven revenue which is why the revenue figures differ from part (c) and part (f)
If the variable cost is $28 and this is 70% of the sales, it means that the selling price must be 28/70%.
In the above question we after calculating breakeven revenue = total fixed costs/ Weighted average CS ratio
which gives the answer $26,402.
my doubt is if after finding breakeven revenue we are asked to find breakeven units for each of the three products.
How do we do it?
in multi-product cvp analysis, when we're trying to figure out the effects of selling products in preference to each other, we rank them according to their C/S ratios and not the contributions they've generated. Why is that the case?
For example, if there are three products
X whose contribution p.u. = $8 , C/S ratio =0.45,
Y's cont. p.u.=$6 , C/S ratio=0.5 and
Z whose cont.p.u,=$3 , C/S ratio=0.33
why shoudn't we produce X first? It generates the highest contribution per unit, so selling it first should make us reach the breakeven point even quicker and the if we ramp up its sales then we'll be more profitable.
But as the rule goes, we should produce Y first then X because it has the highest C/S ratio.
1. **Standardizing Profitability Across Products**: The C/S ratio expresses the contribution margin as a percentage of sales, providing a standardized way to compare products of different price points and volumes. This allows for easier ranking of products regardless of their size or sales volume. The contribution margin alone may not show the relative profitability in the context of varying product prices.
2. **Indicates Efficiency**: The C/S ratio helps assess how much of each dollar of sales contributes to covering fixed costs and generating profit. A higher C/S ratio means a product is more efficient at contributing to profit relative to its sales price, which is especially useful when prioritizing limited resources or deciding which products to emphasize in a portfolio.
3. **Helps Prioritize Sales Efforts**: By using the C/S ratio, you can identify which products are most profitable relative to their sales. Products with higher C/S ratios should be given more attention in marketing and sales efforts, as they contribute more to covering fixed costs and driving profits per unit sold.
In contrast, the contribution margin alone (without considering sales) might not fully reflect the importance of higher-selling items, even if their contribution margin is lower. The C/S ratio provides a better overall understanding when comparing profitability across diverse products.
In the last lecture, you mentioned breakeven revenue = contribution/cs ratio, however in this lecture you said breakeven revenue = fixed cost/cs ratio. Which one is right?
Given that for break even the contribution is equal to the fixed costs, then the breakeven revenue = breakeven contribution / CS ratio = fixed costs / CS ratio.
Can we say that if the contribution is breakeven, then the fixed overhead cost can also be covered?
Sir, may I inquire, what would happen if it took the sales of both P and C to achieve breakeven. How then would you calculate the new breakeven ?
In Notes, it is written that "the C/S ratio is sometimes called the profit volume (or P/V ratio)." I am facing difficulty in understanding it since the profit will be arrived after deduction of fixed cost. And in case of significantly higher fixed cost, may be we don't get any profit. Despite that contribution turned out to be higher in that case. Can you please help me understanding this
1) the product with highest CS ratio guarantee earlier profitability in the short term. therefore its favorable to sell individual products than selling all 3 randomly or jointly.
2) That any product that give a return that is enough to compensate the fixed cost earlier should always be sold first, inevitably that means the product has higher CS ratio.
3) When selling the three products together and when selling one after the other, the line of the two are parallel(in the pv chart).
thanks.
I am maybe misunderstanding what you have written in your third point, but although both charts would end in the same place, the lines are not parallel. When they products are sold one after the other, the line for each product has a different angle.
How are you?
I hope you are doing well,
Thank you sir for your appreciated time actually I do appreciate your effort please sir, could you calculate the breakeven in units first and what's the selling price that we have to multiple to get breakeven revenues for example "6"?
Could you clarify by using numbers?
(fixed cost/ (total contribution/total product unit))=(8000/(41400/21600))=4173.913 unit
then
revenue per unit= total revenue/ total unit= 136800/21600= 6.333
finally
break even revenue= break even unit* revenue per unit= 6.333*4173.913=26434.78
I am particularly having issues with my final answer. I am always rounding off either too early or too late. For example BE (revenue) = $26 402 but I got $26437 ($8000/0.3026). I’m scared I will be penalized heavily in Section A and B which are corrected by the computer as either right or wrong. Do you have any suggestions for me. I thank you in advance.
I am confused about Example 6 (c). You have calculated the Breakeven Revenue using the Breakeven Volume formula, which in the previous lecture was used to calculate the amount of units needed to breakeven. This was then multiplied by the selling price to give us the Breakeven Revenue.
In this lecture you have used the formula to calculate the Breakeven Revenue without multiplying by the average selling price. Should the 26,402 calculated have been units which were then multiplied to give us the Revenue or is there reason how we were able to Revenue from this from the formula - and if so how are we able to differentiate whether our answer should be in units or $.
Thanks
I have realised that we divided the by the C/S Ratio in this example and not the contribution/unit and that is why we are able to get the Revenue.
Thanks
Thankyou.
I can only assume that you are referring to the PV charts, in which case the graph is of the profit and is a straight line for each of P, C and V separately.
Did you watch the earlier lecture on CVP analysis first?
The graph on page 98 of the notes started the profit column as (10,000) but you have (8,000) being fixed cost in the question and in the video. Please is this a mistake? If not how did you arrive at the (10,000) on the horizontal axis?
Additionally, the scaling e.g P is sale 84,000 and profit of 23,800. I don't understand how you arrived at the scaling in the graph answer on the notes, although the video did not put in the scaling. The calculation is clear, but I don't understand the graph scaling in the notes please.
Thank you.
Thank you.
With regard to the scaling, you can use any scaling you want. Since the maximum total revenue is 136,800 and the corresponding cumulative profit is 33,400, then it makes sense to have the axes going up to these amounts. I just made them go up to the 10,000 above in each case.
(Obviously this is not a problem in the exam because you cannot be expected to draw the graph. You can be tested that you understand it, but in that case the graph would be already given to you in the exam.)
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 :)
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.
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)