CVP analysis (multi-product)

This topic has 3 replies, 2 voices, and was last updated 8 months ago by John Moffat.

Viewing 4 posts - 1 through 4 (of 4 total)

Author

Posts
October 16, 2021 at 1:34 pm #637809
Syed Ahsan Ali
- Topics: 107
- Replies: 66
Sir, I have two queries regarding CVP analysis using example 6 of the notes.

1) how can we calculate the Breakeven units and Breakeven revenue in multi-product CVP?

In chapter 8 (example 6) you calculate Breakeven revenue using C/S ratio which I understood exactly but I was trying to calculate BE units and BE revenue without the C/S ratio.

2) How to calculate weighted average contribution margin?

I have Kaplan text which says that BE point in multi-product is calculated by taking Total Fixed costs in the numerator and weighted average contribution margin in the denominator.

Thanks for the help in advance 🙂
October 16, 2021 at 2:54 pm #637812
John Moffat
Keymaster
- Topics: 57
- Replies: 49583
1. Having calculated the total breakeven revenue, you can then calculate the total revenue from each product using the standard ratio. Then dividing by the selling price for each product will give you the units.

2. What you quote from Kaplan is what I do in my free lectures. You can calculate the weighted average contribution margin in two ways, which again I mention in the lectures.
October 17, 2021 at 9:24 am #637841
Syed Ahsan Ali
- Topics: 107
- Replies: 66
(1) You mean to say that calculate the Total BE revenue using average C/S ratio and divide with the Total Revenue of all the products and spread each revenue to each product using sales ratio. Then dividing each product revenue by the selling price for each product will give us Breakeven units.

Products—————C———–V————P———Total
Sales revenue—–24000—–28800—–31800—-136800

C/S ratio for BE revenue = $8000 / 0.303 = $26,402

Divide this by total sales revenue and spead each product sales revenue using sales ratio:

BE revenue of product C = ($26,402 / $136,800) x $24,000 = $4632
BE revenue of product V = ($26,402 / $136,800) x $28,800 = $5558
BE revenue of product P = ($26,402 / $136,800) x $84,000 = $16,212

BE units of Product C = ($4632 / $5) = 926.4 units
BE units of Product V = ($5558 / $6) = 926.3 units
BE units of Product P = ($16212 / $7) = 2316 units
Total BE units = 4168.7 units

(2) You emphasize the contribution to sales ratio to calculate Breakeven revenue in two ways but I don’t know whether it is the same as the weighted average contribution margin or not! If not please elaborate on that.

Is it correct to calculate Be units using weighted avg C/S ratio like this way?

Products————————-C———-V———–P———–Total
Units—————————-4800——4800——12000——21600
Sales mix————————22%——22%——-56%——-100%
Contribution——————-$1.25—–$0.75——$2.65
Weighted Avg C/S ratio—-$0.275—-$0.165—-$1.484—–$1.924

Total BE units = $8000 / $1.924 = 4158

BE units to Product A = 4158 x 22% = 914.76
BE units to Product B = 4158 x 22% = 914.76
BE units to Product C = 4158 x 56% = 2328.48
Total BE units = 4158

Both approaches will give the same answer but a little difference due to rounding. [correct?]

I apologize to ask such a lengthy question.
October 17, 2021 at 2:34 pm #637878
John Moffat
Keymaster
- Topics: 57
- Replies: 49583
I do not have time to check every figure, but it does seem correct (and rounding differences are not a problem in the exam 🙂 )
Author

Posts

Viewing 4 posts - 1 through 4 (of 4 total)

You must be logged in to reply to this topic.