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hi,
I encountered this problematic CVP question. Here’s the question:
Sutton produces four products. Relevant data is shown below for period 2.
Product M Product A Product R Product P
C/S ratio 5% 10% 15% 20%
Maximum sales value $200,000 $120,000 $200,000 $180,000
Minimum sales value $50,000 $50,000 $20,000 $10,000
The fixed costs for period 2 are budgeted at $60,000.
Required
Fill in the blank in the sentence below.
The lowest breakeven sales value, subject to meeting the minimum sales value constraints, is $……..…..I learnt the whole F5 CVP analysis from my textbook; however, I encountered nothing to do with minimum and maximum sales value and I have no idea of how to answer this question. Please guide.
Also, are the construction of PV charts likely to come up in the exam? Especially PV charts with multi product organizations? It is so discouraging. Can they ever come up? Is it likely?
Thanks.
To be honest, I do not think you will get a CVP question this time (because there was one last time).
With regard to the particular example that you have given, it is not so bad – first you have to sell the minimum sales which means that the total contribution will be (5% x 50,000) + (10% x 50,000) + (15% x 20,000) + (20% x 10,000) = $12,500.
The fixed overheads are $60,000 and so there will be a loss of 60,000 – 12,500 = 47,500.To achieve breakeven (profit of zero) you need extra contribution of 47,500.
So…to get to breakeven the sooner, you will make P first (because it has a CS ratio the highest at 20$), But the most extra sales will be 180,000 – 10,000 = 70,000. And so it will give extra contribution of 20% x 70,000 = 14,000.Now you still need 47,500 – 14,000 = 33,500 extra contribution, and so you will go to the one with the next highest CS ratio, which is R. And so on, until you get down to a profit of zero – breakeven.
<cite> @johnmoffat said:</cite>
To be honest, I do not think you will get a CVP question this time (because there was one last time).With regard to the particular example that you have given, it is not so bad – first you have to sell the minimum sales which means that the total contribution will be (5% x 50,000) + (10% x 50,000) + (15% x 20,000) + (20% x 10,000) = $12,500.
The fixed overheads are $60,000 and so there will be a loss of 60,000 – 12,500 = 47,500.To achieve breakeven (profit of zero) you need extra contribution of 47,500.
So…to get to breakeven the sooner, you will make P first (because it has a CS ratio the highest at 20$), But the most extra sales will be 180,000 – 10,000 = 70,000. And so it will give extra contribution of 20% x 70,000 = 14,000.Now you still need 47,500 – 14,000 = 33,500 extra contribution, and so you will go to the one with the next highest CS ratio, which is R. And so on, until you get down to a profit of zero – breakeven.
Thank you. However, I’ll be sitting my exam in the Dec of ’13 and there are chances it can come then 🙂
<cite> @johnmoffat said:</cite>
That’s true 🙂Thanks. But I have this uncleared doubt: Are the construction of PV charts likely to come up in the exam? Especially PV charts with multi product organizations? It is so discouraging. Can they ever come up? Is it likely?
And can I safely assume that the topics that pop up in this coming Jun 2013 session will never pop up in the Dec 2013 session of paper F5?
NB: I just love your lectures. You have a clear bright voice and your explanations are fabulous!! Keep up the work. Wish you were the tutor for other subjects, too.
Drawing PV charts can certainly be asked. You were asked in last December’s exam to draw one – and for multi-products.
(Last December was the first time they were asked, but that was because they only came into the syllabus a year or so ago.)
They did not get asked in todays exam – they could be asked in December 2013’s.(And thank you for your comments 🙂 )
what is the correct answer? me answer is $624000
i divided total fixed cost / (total cont/total sales)No, that is not the answer (doing what you are doing would be assuming that the products were being sold in a constant ratio).
The workings to get to the answer are typed out in one of my previous replies (and this question is probably in your Revision Kit and so there will be a full answer there).
Have you watched my free lectures on CVP analysis?
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