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.

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.)

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 🙂

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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saksham24 says

Hello Mr John, Can you please elaborate why breakeven sales revenue for P is curve.

Thankyou.

John Moffat says

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?

mabafor says

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.

John Moffat says

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.)

rj18 says

Hi Mr John,can you explain how break-even revenue is fixed costs/cs ratio.

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 🙂

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 🙂

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 🙂