Multi-product breakeven analysis

Nndachi789y ago

Hi need help with following A company produces and sells three products, A, B and C. The projected revenue and contribution to sales (c/s) ratios for products A and B are as follows: Product C has a c/s ratio of 25%. The company’s total fixed costs are $5.5 million and the company wants to earn a profit of $1 million. What is the revenue that needs to be generated by Product C, in $ million, to achieve the required profit? Give your answer to the nearest $ million

C-Cath - CIMA Tutor9y ago#1

Hi, Thank you for your question -I have moved this to a new thread so that it doesn't get buried with the older post. I'm happy to help you with your question which appears to be a variation on Target profit - however, some of the information is missing from your post - i.e. the details for product A and B. Please can you add this detail and I will be happy to help you work through this question. Kind Regards Cath

Nndachi789y ago#2

sorry please find additional infor Product has Revenue of $10M and B $20M C/s ratio Product A 15% and B 10% many thnks

C-Cath - CIMA Tutor9y ago#3

Hi Apologies for the delay - I didnt not receive notification that you had replied. Ok. So this is an slightly unusual CVP calculation in that at first it appears you do not have sufficient information to answer. This is because its not solved with our usual weighted average CS ratio method that we usually use for multi-product breakeven instead we go back to basics. Breakeven is the point where we make no profit or loss so Profit = Total Revenue - Variable costs - Fixed costs For breakeven we would equate Profit to zero - applied to our scenario - using the figures we do have ( and using the c/s ratio of products A and B to get the variable costs for each of these products) We can state ( using the numbers we do have relating to product A and B) that: P = TR - VC - FC $0 = (20+10) - (8.5+18) - 5.5 A breakeven these should equal zero - but instead they equal -2 which means we are missing 2m contribution from product C in order to breakeven. Using the c/s ratio of product C we can find that if contribution = 2m and c/s ratio = 0.25 then product C's breakeven sales revenue must be 8million. Ok - but we are not interested in breakeven values for product C - we have a target profit of 1million to make. so instead of P= 0 we have to balance: P = TR - VC - FC 1m = 30 -(8.5+18.5) - 5.5 This time this equals -3million so if contribution needed from C is 3million and product C's c/s ratio is 0.25 then 3/0.25 = 12million. That should be the correct answer to the best of my knowledge. As a double check we have: Profit = TR - VC - FC Profit = (20 + 10+ 12) - ( 8.5 +18.5 +9) - 5.5 Profit = 1million. Thats quite a lengthy explanation so please let me know if you dont follow. Many Thanks