Multiple Product CVP Analysis The easy way. What is multiple product CVP Analysis? Sell multiple...

Multiple Product CVP Analysis

The easy way

What is multiple product CVP Analysis?

• Sell multiple products• Ratio of products sold is assumed

constant• Determine the Total Sales dollars and

Total quantity of units to be sold AS WELL AS the Sales and Units Sales of the individual products

Setting up the problem

• The challenge of Multiple product CVP analysis is diminished when you set up the problem correctly.– Create CM income statement for each product– Create a TOTAL column that is a summation

of the different products

Example: setting up the problem

• Assume that a company sells two products: Product A and Product B. The sales prices are 10 for product A and 15 for product B. Variable costs per unit of Product A are 8 and $9 for Product B. The company has TOTAL FIXED costs of $5,000. Assume the company expects to sell 1,500 units of Product A and 500 units of Product B.

Setting up the problemUNITS 1,500 500 2,000

Product A Product B TOTALSales $ 15,000 $ 7,500 $ 22,500

Variable costs $ (12,000) $ (4,500) $ (16,500)

Contribution Margin $ 3,000 $ 3,000 $ 6,000

Fixed Costs $ (5,000)

Net Income $ 1,000

Weighted Average CM and CM%

• The textbook likes to make this complicated.

• If you set up the problem as shown, the calculation of the Weighted Average CM and Weighted Average CM% are simple.

• You use the TOTAL COLUMN!

Weighted Average CM

• Take the Total CM from TOTAL column ($6,000 in example) and divide by total units (2,000 in example).

• In example this gives a Weighted Average CM of $3 per unit.

Weighted Average CMUNITS 1,500 500 2,000

Product A Product B TOTAL

Sales $ 15,000 $ 7,500 $ 22,500

Variable costs $ (12,000) $ (4,500) $ (16,500)

Contribution Margin $ 3,000 $ 3,000 $ 6,000

Fixed Costs $ (5,000)

Net Income $ 1,000 Weighted Average CM is

$6,000/2,000 units = $3/unit

Weighted Average CM%

• Calculated similarly to the Weighted Average CM

• Take the CM from the TOTAL column ($6,000 in example) and divide by the Sales from the TOTAL column ($22,500 in example).

• $6,000 / $22,500 = 26.67% (.2667)

Weighted Average CM%UNITS 1,500 500 2,000

Product A Product B TOTAL

Sales $ 15,000 $ 7,500 $ 22,500

Variable costs $ (12,000) $ (4,500) $ (16,500)

Contribution Margin $ 3,000 $ 3,000 $ 6,000

Fixed Costs $ (5,000)

Net Income $ 1,000

Weighted Average CM%

$6,000 / $22,500 = 26.67%

Calculating the Breakeven Point in Units

• Use the formula you already know, but use weighted average CM:Breakeven units = (FC + Profit) / Wt. avg. CM

• This gives the TOTAL number of units for the company to be sold at the breakeven point.

• You must then determine how many of Product A and Product B will be sold at the breakeven point.

Figuring TOTAL UNITS to be sold at breakeven

UNITS 1,500 500 2,000

Product A Product B TOTAL

Sales $ 15,000 $ 7,500 $ 22,500

Variable costs $ (12,000) $ (4,500) $ (16,500)

Contribution Margin $ 3,000 $ 3,000 $ 6,000

Fixed Costs $ (5,000)

Net Income $ 1,000

Breakeven Units:

(5000 + 0) / 3 = 1,667 (rounded)

Allocate TOTAL UNITS to each product based on EXPECTED UNITS

PROPORTION

• We must assume that the company will continue to sell the products in fixed proportions.

• In this example the sell 1,500 units of Product A and 500 units of Product B.

• So the proportion of units of Product A is 1,500/2,000

• The proportion of units of Product B is 500/2,000.

The Allocation to determine units of each product sold at the breakeven point

• Take the TOTAL UNITS to be sold at the breakeven point (1,667) and multiply by each product’s proportion

• PRODUCT A: 1,667 * (1,500/2,000) = 1250 units

• PRODUCT B: 1,667 * (500/2,000) = 417 units

So…

• So, at the breakeven point, the company will expect to sell 1,250 units of Product A and 417 units of Product B.