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



1 item @ $5



Nectar  Packets

10 items @ $2 each



"Unit"  contribution




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


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
Elements of Non - Manufacturing costs Non-Manufacturing costs are costs incurred via all activities such support the production of services and goods. They are selling costs

Accounting Treatment of Spoilage Costs 1) Normal Spoilage Costs: These costs are assigned to the good output utilizing two approaches as: (i) Omission Approach:  Under th

Economic Order Quality or EOQ Define the model and the three methods of computing the EOQ. 1. Assumptions of the model. Illustration The given information was extra

Labour Costs and Overhead costs Labour Costs Labour costs can be indirect or direct labour costs. Direct labour cost refers to wages paid to workers who such are directly

Describe Operating Costing The Chartered Institute of Management Accountants, London defines "operating cost" as "the cost of providing a service." Services performed may be in

Methods of Allocating Service Costs Direct Method The service costs are merely allocated to the production department according to the usage of the services given. St

A local hotel offers lodging services.  You can pick a name for the hotel(Home Sweet Home Hotel). Your team will develop a prototype reservation system to record client bookings fo

Alger Corp wants to buy some construction equipment for $50,000, which has a useful life of 4 years with no salvage value. Alger uses straight-line depreciation. Alger has a tax ra

process costing new practices