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

Prepare the journal entries to record depreciation, Moore Corporation follo...

Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a 5% depreciation charge per year on buildings (the corporation uses the nearest full

Methods required to allocate joint costs, Methods Required To Allocate Join...

Methods Required To Allocate Joint Costs 1) Physical/Unit Measure 2) Constant gross margin rate 3) Net realizable value.

Standard costing, What are the benefitss and drawbacks of standard costing?...

What are the benefitss and drawbacks of standard costing?

Calculate the current cost capital, The Zooline Company (Pty) Ltd is an Ame...

The Zooline Company (Pty) Ltd is an American based company that focuses on the LSM 8 -10 markets. They do vehicle interiors, raise or lower suspensions and install top end sound sy

Find an article just-in-time inventory systems, Find a journal article onl...

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

Concept of cost, explain fully the concept of the cost.how does cost accoun...

explain fully the concept of the cost.how does cost accounting contribute to the effective and efficent management of an industrial established?

Capital, Capital We have seen previous in this section that the fundame...

Capital We have seen previous in this section that the fundamental accounting equality states as: Assets = liabilities + owners equity. From the illustration of balanc

Determine taxable profit, While on a business trip to Texas, David attended...

While on a business trip to Texas, David attended a mortgage foreclosure auction. At the auction (held on February 4, 1999), he acquired an abandoned sugarcane farm near Pearland.

Exercise I do not understand, what would your answer be to the following pr...

what would your answer be to the following problem, please show detailed calculations: The XYZ Company manufacturers Part 123 for use in its production line. The manufacturering co

Timing of cashflows, The time of cashflows for the project are as follows; ...

The time of cashflows for the project are as follows; Operating Income (rent) is received annually, in advance. For NPV purposes they are assumed to have been received at th

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