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

Calculate the retained profit, Harriet Ltd is a trading company set up a nu...

Harriet Ltd is a trading company set up a number of years ago with 5,000 £1ordinary shares issued at par. In order to expand the production facilities it needs to raise a further £

Compute the break even point, Park & Morgan, a law firm, is considering ope...

Park & Morgan, a law firm, is considering opening a legal clinic for midde- and low income clients. The clinic would bill at a rate if $18 per hour. It would employ law students as

Break even point, Campground Inc. is considering the production and sale of...

Campground Inc. is considering the production and sale of propane lamps. Annual fixed costs associated with the project are expected to total $60,000. In addition, each lamp would

What is the predetermined overhead rate, Morrow Company applies overhead ba...

Morrow Company applies overhead based on direct labor hours. At the beginning of the year, Morrow estimates overhead to be $620,000, machine hours to be 180,000, and direct labor h

Purchase cost and ordering cost, Ordering cost is incurred whenever the ...

Ordering cost is incurred whenever the inventory is replenished. It includes costs associated with the processing and chasing of the purchase order transportation, inspec

Evaluate the acquisition of manufacturing equipment, Evaluate the Acquisiti...

Evaluate the Acquisition of Manufacturing Equipment XYZ Limited is a medium sized company providing a range of medical solutions. You, the financial manager has been asked to e

Purpose of cost accounting, what is the purpose of cost accounting and its ...

what is the purpose of cost accounting and its nat ure?

Cost accounting, diff between cost estimation and cost accounting

diff between cost estimation and cost accounting

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