Chapter 8

Managerial Accounting Multiple Product Cost Volume-Profit Analysis

Prepared by Diane Tanner University of North Florida

Sales Mix

  What is sales mix?

 The relative proportion in which a company’s products are sold Based on the premise that different products have different selling prices, cost structures, and contribution margins Units Sales Expenses Profit

Buckets

2,000 $4,000 $1,600 $2,400

Pails

8,000 $6,000 $3,500 $2,500

Two ways to express

• Unit sales mix 2000 : 8000 1 : 4 • Revenue sales mix 4000 : 6000 2 : 3 2

Pushing Products to Customers

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Goal is to generate the largest profit

If customers prefer to buy one product and are indifferent to their cost Push the product with the higher contribution margin per unit If customers prefer to spend a fixed sum of money and are indifferent to products they buy Push the product with the higher contribution margin ratio (i.e., the highest profit out of each sales dollar)

Pushing Products to Customers

ABC Company provides the following product sales analysis reflecting sales of 500 of product A and 1,000 of product B for 2018: 4

Sales Variable costs Contribution margin Fixed costs Profit Product A Product B $ 10,000 40% $ 16,500 55% Total $25,000 100% $ 30,000 100% $ 55,000 100.00% 15,000 60% 13,500 45% 28,500 51.82% 26,500 48.18% 17,000 $ 9,500

Assume customers will buy only one item. Which product will you ‘push’ to your customers?

A = $10,000/500 = $20.00

B = $16,500/1,000 = $16.50

Push the product with the highest CM per unit—Product A (CM/unit= $20 per item)

Pushing Products to Customers

ABC Company provides the following product sales analysis reflecting sales of 500 of product A and 1,000 of product B for 2018: 5

Sales Variable costs Contribution margin Fixed costs Profit Product A Product B $ 10,000 40% $ 16,500 55% Total $25,000 100% $ 30,000 100% $ 55,000 100.00% 15,000 60% 13,500 45% 28,500 51.82% 26,500 48.18% 17,000 $ 9,500

Assume customers will spend exactly $2,000.

Which product will you ‘push’ to your customers?

A = 40% × $2,000 = $800 B = 55% × $2,000 = $1,100 Push the product with the highest CM ratio— Product B (CM = 55%)

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Two Assumptions of Multi-Product CVP Analysis

6 Sales Mix is Constant SUVs No Inventories are Held Sedan Units Produced = Units Sold

Multiproduct Analysis Two approaches



Contribution margin approach

 For similar products  A weighted average approach  Calculates ‘units’ needed to breakeven 

Contribution margin ratio approach

   For substantially different products A weighted average approach Calculates ‘dollars’ needed to break even 7

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Determining BEP with Multiple Products

  To determine the number of units to be sold for multiple products, use  Weighted average CM per unit, and  Unit sales mix To determine the sales dollars to be generated for multiple products, use  Weighted average CM ratio, and  Revenue sales mix

Contribution Margin Per Unit Approach

9 How many units of each product must be sold to break even?

Sales Variable costs Contribution margin Fixed costs Profit Product A Product B Total 500 1,000 1,500 $25,000 100% $ 30,000 100% $ 55,000 100.00% 15,000 60% 13,500 45% $ 10,000 40% $ 16,500 55% 28,500 51.82% 26,500 48.18% 17,000 $ 9,500

Weighted-average CM per unit = $26,500/1,500 = $17.6657 per unit Unit sales mix = 500 : 1,000  1 : 2 BEP in units = SPx – VCx – TFC = Profit CMx - TFC = Profit 17.6657x – 17,000 = 0 X = 962.31 total units A: 1/3 × 962.31 = 321 units B: 2/3 × 962.31 = 642 units

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Contribution Margin Ratio Approach

How much sales revenue of each product must be sold to break even?

Sales Variable costs Contribution margin Fixed costs Profit Product A 500 Product B 1,000 $ 10,000 40% $ 16,500 55% Total 1,500 $25,000 100% $ 30,000 100% $ 55,000 100.00% 15,000 60% 13,500 45% 28,500 51.82% 26,500 48.18% 17,000 $ 9,500

Revenue sales mix = 25,000 : 30,000  5 : 6 BEP in units = CMRx- TFC = Profit 0.4818x – 17,000 = 0 X = $35,284.35

A: 5/11 × $35,284.35 = $16,038.34

B: 6/11 × $35,284.35 = $19,246.01

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The End