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Dear John,
I hope you are doing well,In the multi-product profit – volume graph.
its mentioned that we should rank the products first according to their profitability using contribution to sales ratio.
My question is why we use contribution to sales ratio instead of the absolute contribution figure per unit in ranking the products profitability.
Because ranking the products in terms of contribution to sales ratio is different from ranking according to contribution absolute figure.Thank you in advance.
It is different, but we use the CS ratio because we want to get the most contribution for the level of sales which is what we will achieve by ranking them by their CS ratios.
Dear John,
Do you mean that we can use absolute figure of contribution in ranking products if we don’t have budgeted sales to achieve?
No.
CVP analysis always revolves round achieving breakeven. When is is multi-product analysis then unless the products have to be made in a fixed ratio, the fastest way of achieving breakeven is to first produce (and sell) the product with the highest CS ratio. Obviously there will be a limit on the number that can be sold and we then move on to the product with the net highest CS ratio, and so on.
Have you watched my lecture on this because I do show in my example how and why we do this.
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