Multi-product Cost Volume Profit analysis – ACCA Performance Management (PM)
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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).
How do we compute break even sales volume (units) for the 3 products ?
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.
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!
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)
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
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%.
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?
It is because it is breakeven revenue that we are after.
Thanks a ton!
Sir, what will be the sales unit at which the revenue will be zero?
Zero!! Zero revenue means that they are not selling anything!!
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.
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.