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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › CVP analysis example 3 and 6
1)Sir in example 6 of CVP analysis, you have taken average C/S ratio while calculating BE revenue, can’t we calculate C/S ratio of each product individually and then sum up them and then put it in denominator instead of average C/S ratio?
2)In example 3 where question says that what sales revenue is needed to generate a target profit of $320… Here you have first calculated contribution (profit + FC) i.e 320 + 1000 = 1320 and then you have divided contribution (1320) by c/s ratio (0.666666), I have understood this, but my question is that can’t you calculate revenue like this that we know variable cost in the question is $2/unit, and here we are making 300 units , so we add contribution and variable cost to get sales revenue. i,e 1320+(300×2) = 1920….
1. You can’t simply add C/S ratios in order to get an average – it would be arithmetically wrong, you can never simply add averages. What you could do (as I explain in the lectures) is take a weighted average of the C/s ratios, weighting by the sales revenues. That would give the same result, and would be fine 🙂
2. Two problems – firstly we will need to sell more than 300 units (300 units gives zero profit, and we need more profit). Secondly, we need a contribution of 320 – the contribution per unit is the selling price less the variable costs.