Cvp for multiple products, Cost Accounting

CVP for Multiple Products

What number of businesses sells only one manufactured goods? The reality is that firms usually give us the diverse product line, and the individual products will have different, contribution margins, selling prices and contribution margin ratios. Yet, the firm's whole fixed cost picture may be the same, does not matter the mix of the products sold. This can cloud the ability to do simple CVP analysis. To lift this cloud needs some knowledge of the product mix.

Let's suppose Hummingbird Feeders produces and sells a brightly coloured feeding container for $15 (variable cost of production is $10, and contribution margin is $5) and the nectar formula for $3 each packet ($1 variable cost to produce, resulting in a $2 contribution margin). Hummingbird Feeders sells 10 packets of nectar for the every feeder sold. Its permanent cost is $100,000. What number of feeders and packets should be sold to break even? To answer to this question needs a redefinition of the "unit." If we suppose the "unit" is 1 feeder and 10 packets, we would then see that each of the "unit" would have a contribution margin of $25, as given below.

Contribution Margin

 

Feeder

1 item @ $5

=

$5.00

Nectar  Packets

10 items @ $2 each

=

  20.00

"Unit"  contribution

 

 

$25.00

To recover the sum of $100,000 of the fixed cost, at $25 of contribution per "unit," would need selling 4,000 "units" ($100,000/$25). To be clear, this translates into 4,000 the feeders and 40,000 packets of the nectar. The whole breakeven sales would be $180,000 (($15 X 4,000 feeders) + ($3 X 40,000 packets)). Obviously, the validity of this analysis relies upon actual sales occurring in the the predicted ratio. Changes in product mix will result in the changes in the break-even levels. If Hummingbird Feeders sold $180,000 in feeders, and no packets of nectar at all, they would come nowhere near the breakeven because the giving margin ratio on feeders is much lower than on the packets of the nectar.

Note that one could also obtain the $180,000 result by dividing the fixed cost by weighted-average contribution margin ($100,000/0.555 = $180,000). The weighted-average involvement margin of 0.555 is calculated is shown below:


Feeder (1 @ $15)  $15/$45           X         $5/$15 =          0.1111

Nectar Packets (10 @ $3) $30/$45           X         $2/$3   =          0.4444

0.5555

Businesses should be mindful of the product mix. Automobile manufacturers have a wide range of products, some at the high margin and some at the lower levels. If customers surprisingly substitute economy cars for sport utility vehicles, the basic models for luxury models, etc., the resulting bottom line impacts can be important. Product mix can also be necessary for companies which sell a base product and a related disposable. For instance, a printer manufacturer can sell "unprofitable" printers along with the large quantities of high margin ink cartridges. Managers of such businesses require watching not only the total sales, but also keep an eye on the product mix.

Posted Date: 7/21/2012 4:38:47 AM | Location : United States







Related Discussions:- Cvp for multiple products, Assignment Help, Ask Question on Cvp for multiple products, Get Answer, Expert's Help, Cvp for multiple products Discussions

Write discussion on Cvp for multiple products
Your posts are moderated
Related Questions
Q. Explain Break-even analysis? Cost-volume-profit (CVP) analysistracks that how profit changes when there are changes insales price, variable costs, fixed c

Chemical Recovery Company uses common machinery to manufacture two products.  Each year, the company has a total of four productions runs, which is two production runs for each pro

#purchase price R45 order costs R175 lead time 6 days cost of capital (after taxation) 20% direct inventory holding costs R25 annual demand 8500 units business operational 330day p

Beginning inventory on March 1 consisted of 2,000 units each costing $11.20. During March, the following was purchased for inventory: Date Purchase

Following figures are taken from annual budget of ABC manufacturers for the year 2013: Fixed factory overhead Rs. 4,000,000 Factory overhead absorption rate Rs. 70 per direct labor

Controllable and Non Controllable Costs Controllable costs can be influenced on the level of authority at that they are being analyzed when non-controllable costs cannot.

Mrs. M. Botham is a sole trader, selling a variety of fashionable clothing materials. Her business year end is 31 December 2011. You have been given the following trial balance

XYZ Co. manufactures automation machinery according to customer specifications.  The company is relatively new and has grown each year.  XYZ Co. operated at about 75% of practical


Write a 1,200- to 1,500-word paper explaining the legal aspects, financial standards involved, and ethicality of the Excello Telecommunications case. Your paper should include the