Transcript Multiple Product CVP Analysis

Multiple Product CVP Analysis
The easy way
What is multiple product CVP
Analysis?
• Sell multiple products
• Ratio of products sold is assumed
constant
• Determine the Total Sales dollars and
Total quantity of units to be sold AS WELL
AS the Sales and Units Sales of the
individual products
Setting up the problem
• The challenge of Multiple product CVP
analysis is diminished when you set up the
problem correctly.
– Create CM income statement for each
product
– Create a TOTAL column that is a summation
of the different products
Example: setting up the problem
• Assume that a company sells two
products: Product A and Product B. The
sales prices are 10 for product A and 15
for product B. Variable costs per unit of
Product A are 8 and $9 for Product B. The
company has TOTAL FIXED costs of
$5,000. Assume the company expects to
sell 1,500 units of Product A and 500 units
of Product B.
Setting up the problem
UNITS
1,500
500
2,000
Product A
Product B
TOTAL
Sales
$
15,000
$
7,500
$
22,500
Variable costs
$
(12,000)
$
(4,500)
$
(16,500)
Contribution Margin
$
3,000
$
3,000
$
6,000
Fixed Costs
$
(5,000)
Net Income
$
1,000
Weighted Average CM and CM%
• The textbook likes to make this
complicated.
• If you set up the problem as shown, the
calculation of the Weighted Average CM
and Weighted Average CM% are simple.
• You use the TOTAL COLUMN!
Weighted Average CM
• Take the Total CM from TOTAL column
($6,000 in example) and divide by total
units (2,000 in example).
• In example this gives a Weighted Average
CM of $3 per unit.
Weighted Average CM
UNITS
1,500
500
2,000
Product A
Product B
TOTAL
Sales
$
15,000
$
7,500
$
22,500
Variable costs
$
(12,000)
$
(4,500)
$
(16,500)
Contribution Margin
$
3,000
$
3,000
$
6,000
$
(5,000)
$
1,000
Fixed Costs
Weighted Average CM is
Net Income
$6,000/2,000 units = $3/unit
Weighted Average CM%
• Calculated similarly to the Weighted
Average CM
• Take the CM from the TOTAL column
($6,000 in example) and divide by the
Sales from the TOTAL column ($22,500 in
example).
• $6,000 / $22,500 = 26.67% (.2667)
Weighted Average CM%
UNITS
1,500
500
2,000
Product A
Product B
TOTAL
Sales
$
15,000
$
7,500
$
22,500
Variable costs
$
(12,000)
$
(4,500)
$
(16,500)
Contribution Margin
$
3,000
$
3,000
$
6,000
$
(5,000)
$
1,000
Fixed Costs
Weighted Average CM%
$6,000 / $22,500 = 26.67%
Net Income
Calculating the Breakeven Point in
Units
• Use the formula you already know, but use
weighted average CM:
Breakeven units = (FC + Profit) / Wt. avg. CM
• This gives the TOTAL number of units for
the company to be sold at the breakeven
point.
• You must then determine how many of
Product A and Product B will be sold at the
breakeven point.
Figuring TOTAL UNITS to be sold
at breakeven
UNITS
1,500
500
2,000
Product A
Product B
TOTAL
Sales
$
15,000
$
7,500
$
22,500
Variable costs
$
(12,000)
$
(4,500)
$
(16,500)
Contribution Margin
$
3,000
$
3,000
$
6,000
$
(5,000)
$
1,000
Fixed Costs
Breakeven Units:
(5000 + 0) / 3 = 1,667 (rounded)
Net Income
Allocate TOTAL UNITS to each product
based on EXPECTED UNITS
PROPORTION
• We must assume that the company will continue
to sell the products in fixed proportions.
• In this example the sell 1,500 units of Product A
and 500 units of Product B.
• So the proportion of units of Product A is
1,500/2,000
• The proportion of units of Product B is
500/2,000.
The Allocation to determine units of each
product sold at the breakeven point
• Take the TOTAL UNITS to be sold at the
breakeven point (1,667) and multiply by
each product’s proportion
• PRODUCT A: 1,667 * (1,500/2,000) = 1250 units
• PRODUCT B: 1,667 * (500/2,000) = 417 units
So…
• So, at the breakeven point, the company
will expect to sell 1,250 units of Product A
and 417 units of Product B.