Cvp for multiple products, Cost Accounting

Assignment Help:

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.


Related Discussions:- Cvp for multiple products

What is chargeback, A process in the industry where a wholesaler needs an a...

A process in the industry where a wholesaler needs an amount that is the difference among the manufacturer's price to the wholesaler and the contract price to the resale customer.

Prepare a spreadsheet of an overhead budget, Prepare a spreadsheet of an ov...

Prepare a spreadsheet of an overhead budget for the company in Problem 5 on page 216 of the textbook. You have been running a construction company out of your home with your spouse

Labour cost, labour cost related case study with solution

labour cost related case study with solution

Multiple products, Multiple Products, Selling Costs, and Margin Management ...

Multiple Products, Selling Costs, and Margin Management Selling charge are oftentimes variable. For instance, a salesperson can be paid a designated percentage of entire sales

Methods of labour remuneration, Methods of Labour Remuneration There L...

Methods of Labour Remuneration There Labour remuneration methods can be broadly classified into two factors as: i. Time rate or on the basis of the time spend in the factor

Prepare a forecast of cashflow, A company is to produce an IC and a chip si...

A company is to produce an IC and a chip size of 120mm2 has been estimated, based on using a full-custom nMOS technology on 8" wafers. The process has a 92% yield at the wafer fab

Calculate the breakeven fee income, A company provides several different se...

A company provides several different services to its customers from a single office. Fixed costs of the office, including staff costs, are absorbed into the company's service costs

Manufacturing, What are the reasons of preparing income statement?

What are the reasons of preparing income statement?

Calculate the variable overhead, Questions 8-10 rely on the following data....

Questions 8-10 rely on the following data. FrontGrade Systems allocates manufacturing over- head based on machine hours. Each connector should require 11 machine hours. According t

Creating budget and annual operating budget assignment, This assignment wil...

This assignment will consist of developing a center-based financial operating budget. A break-even and Cash-flow projection are not required for this assignment. Students will deve

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd