cvp analysis (muti product) examiner report doubt

Sample Questions for Discussion

Here we take a look at two Section A questions which proved to be particularly difficult for candidates.

Example 1 Mabel Co manufactures and sells tables and chairs in a standard mix of one table to four chairs. The following information is available:

Product: Table Chair

Variable cost per unit ($) 120 and 16

Contribution to sales ratio 0.4 and 0.6

Annual fixed costs are $100,000.
What is the break-even point in sales revenue (to the nearest hundred dollars)

A $210,500
B $178,600
C $200,000
D $204,500

ANSWER:

What does this test?

? The calculation of a break-even point in a multi-product situation.

What is the correct answer?

? The correct answer is D

? To calculate break-even revenue in a multi-product situation requires the annual fixed costs to be divided by the weighted average contribution to sales ratio.

To do this firstly the selling price of both products need to be determined. The selling price of a table is calculated as the variable cost divided by 1 – the C/S ratio: $120/(1-0.4) = $200. The selling price of a chair is $16/(1-0.6) = $40. Once the selling prices are determined the contribution of each product can be calculated. For a table this will be $200 x 0.4 = $80 and for a chair this will be $40 x 0.6 = $24.

Now we have the selling price and contribution for both products we can calculate the weighted average C/S ratio. Sales revenue based on the sales mix will be (1 x $200) + (4 x $40) = $360 and contribution will be (1 x $80) + (4 x $24) = $176; this gives a C/S ratio of 0.489.

Therefore the break-even revenue is $100,000/0.489 = $204,499 and to the nearest hundred dollars is $204,500 ?

Selecting option A would have been based on calculating the weighted average C/S ratio using incorrect weightings ?

Selecting option C would have meant that a straight average of the product’s C/S ratios was used ?

Selection option D would have been arrived at by weighting the C/S ratios by units

In this question, neither did we have contribution per unit nor the selling price per unit.

The examiner has first derived the SP per unit and then contribution per unit. He has then calculated the CS ratio by dividing the total contribution by total revenue.

I didn’t get why u said that the examiner has “weight the individual CS ratios by the sales revenue when the sales revenue per product is not given.

KAPLAN APPROACH:

QUESTION:

PER plc sells three products. The budgeted fixed cost for the period is
$648,000. The budgeted contribution to sales ratio (C/S ratio) and sales
mix are as follows:

Product C/S ratio Mix

P 27% 30%

E 56% 20%

R 38% 50%

Required:
What is the break-even sales revenue?

Answer:

Breakeven point in $ = Fixed cost/C/S ratio of the mix

C/S ratio of the mix= (0.3 × 27%)+(0.2 × 56%)+(0.5 × 38%) = 38.3%

Therefore, BEP = 648000/38.3%

= $1,691,906

Thank you, sir.
I have watched all your lectures and they are great.

I am really sorry sir but I am not able to understand how you are getting 0.489.

If I follow the Kaplan approach for the original question it would be something like this:

(c/s ratio*std mix of the product)

Therefore weighted average c/s ratio:

Table (1/5*0.4)+Chair(4/5*0.6)
= 0.56

Breakeven revenue: 100000/0.56
= 178600 (to the nearest 100 dollars) OPTION B

The doubt is that in the original question the contribution per unit and sp per unit is not given and if I don’t wish to use the examiner’s approach as it is time-consuming and go with the Kaplan approach this what I get which is wrong.

0.489 is only possible if we have sp per unit. but for a moment if we assume the variable cost per unit is not given for the original qs (like the Kaplan qs ) then it is not possible to find sp per unit and therefore the weighting the cs ratios by the revenues wouldn’t be possible.

In such a case what to do? you said the Kaplan way is fine too. but I ain’t getting the right answer with that. in exam what if we get a qs with just the std mix and c/s per unit, without variable cost, selling price and contribution per unit. ( like the Kaplan qs )

Thank you so much, sir. Your explanation is of great use.

I just read the Kaplan question and realized that it’s not the product mix that is given but the sales mix.

I thought they mean the same but sales mix is different from the product mix. Right sir?

Because many times they use sales mix in place of product mix or they say ” sales or product mix of the XYZ co.” so this part was a little confusing.

If you could just explain the difference between sales mix and product mix

Thank a lot, sir.
Your explanation is of great value.