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

Corporate accounting systems, Using the  information provided prepare  the ...

Using the  information provided prepare  the four financial  statements  for inclusion in Plantagenet Ltd's Annual Report dated at its balance date of 30th June 2011. The statement

Evaluate equivalent annual cost, An industrial drill costs $60.000 to purch...

An industrial drill costs $60.000 to purchase and $10,000 to install seven years ago. The market value now is $33.000 and this will decline by 12% of current value each year for th

Advantages of average costing method, Average costing method has the follow...

Average costing method has the following main advantages: 1.It is a realistic costing method useful to management in analyzing operating results and appraising future production

Prepare a statement of cash flows, 2012                     2011 Cash   ...

2012                     2011 Cash                               12200                 17700 Acct receivable                  25200                  22300 Investments

Government and nonprofit accounting, I need project help in Government and ...

I need project help in Government and nonprofit accounting, can you help me in look out this problems?

Tax depreciation affect the cash flows statement?, What type of activity co...

What type of activity could a company engage in to improve their cash flows in their Cash Flows Statement? Is this ethical? Could borrowing money make the cash from operations be

Create the consolidated statement of comprehensive income, Question ...

Question The statements of comprehensive income for three entities for the year ended 30 September 2009 are presented below: SOT PB UV

Types of overhead absorption rate, Types of Overhead Absorption Rate ...

Types of Overhead Absorption Rate NB: Overheads incurred are generally absorbed on the basis of budgeted or estimated figures. The given basis may be applied leading to the

Weighted average method, Weighted Average Method This way is a perpet...

Weighted Average Method This way is a perpetual weighted average system whereas the issue price is recalculated after one of receipt of stocks taking into accounts both money

External sources of funds, These sources of funds are resources increased f...

These sources of funds are resources increased from outside the organization to augment funds availability for any of the utilizations to be discussed later. Generally, there are o

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