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

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).

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).

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

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?

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

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

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 $.

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 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)

shakir7385 says

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

John Moffat says

That is why PV ratio is a bad name for it – it doesn’t use the profit but used the contribution.

daisy24 says

hi, please with example 6d how did you get the sales revenue of 150,000 for the pv chart. thank you

ABDULLAHI312 says

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.

John Moffat says

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.

ABDULLAHI312 says

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).

John Moffat says

They are all straight lines, not curves, but they are not parallel to each other.

7fsa says

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?

John Moffat says

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.

nadernavaee says

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

ellesouth16 says

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?

ellesouth16 says

is it because total contribution is equals to fixed cost?

John Moffat says

Yes, it is because at breakeven the total contribution is equal to the fixed costs 馃檪

ellesouth16 says

Thank you so much! Sir.

John Moffat says

You are welcome 馃檪

kuaijishi says

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.

John Moffat says

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

lucytan says

Dear John How Do you arrive at the break-even figure 23400?

John Moffat says

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

francihco says

I think Lucytan refers to a potential typo on the graph on minute 23:38.

robynm says

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

robynm says

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

John Moffat says

I am glad that you are clear now 馃檪

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!!! 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?

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 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