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

Link between Financial and Cost Books The link among the two sets of books is achieved via operating a cost ledger control account and a financial ledger control account.  Cos

The controller for U.S. Route 66 Truck Parts is comparing traditional overhead allocationwith ABC. After studying both approaches, the controller prepared the following list of fea

Total costs include both variable costs and fixed costs. Variable costs are costs which can beeasily identified or related to a cost per unit or activity level of some kind for exa

The following facts have been extracted from the standard cost card for product X:

Service Cost Centres Since no production cost units pass via the service cost centers, it is essential to apportion the service department costs; to the production cost center

what is the equivalent unit for materials? if the cost of normal lots units are absorbed by the units transferred out to the next department the work in process- beginning (60% com

On January 1, 2012 Morgan's Motors issued $500,000 of 3-year, 8% bonds when the market yield was 6%. The bond agreement stated that compounding was semi-annual with payments due on

Find a journal article online about just-in-time inventory systems. In the subject line of your post, include the title of the article that you read. Post a link to that article wi

1. The Initial Borrowings required are determined by the amount required to start  the project less the Cash Invested by the Corporation.  The loans will always be principle & inte