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Multi-product Cost Volume Profit analysis – ACCA Performance Management (PM)

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  1. 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?

    • 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.

      • 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?

  2. 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 ?

    • 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.

      • 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 ?

  5. 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

  7. 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.

    • 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.

      • 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).

  8. 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?

    • 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

  9. 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?

  10. 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鈥檓 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.

    • 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 馃檪

  12. 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

    • It isn’t a curve!!! 馃檪

      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?

  14. 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.

    • 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.)

  16. 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

  18. 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.

  19. 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.

  20. 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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