7 Multi-product Breakeven Activities

Question 1

what-if analysis

Answer 1

study of impact of forecast variables on the forecast

Question 2

breakeven analysis (cost-volume-profit, CVP analysis)

Answer 2

studies impact of changes in fixed & variable cost, sales prices, quantity & mix on profit

Question 3

contribution per unit

Answer 3

= selling price - variable cost

Question 4

profit

Answer 4

= (sales volume x cont per unit) - fixed costs

Question 5

breakeven point

Answer 5

activity level at which there’s neither profit or loss = total fixed cost / cont per unit = req cont / cont per unit

Question 6

C/S ratio

Answer 6

= P/V ratio = (contribution / sales) x 100%

Question 7

sales rev at breakeven

Answer 7

= fixed costs / (C/S ratio)

Question 8

margin of safety (units)

Answer 8

(budgeted - breakeven) sales units

Question 9

margin of safety (%)

Answer 9

(budgeted - breakeven) sales / budgeted sales x 100%

Question 10

sales volume at target profit

Answer 10

= (fixed cost + target profit) / cont per unit

Question 11

break-even assumptions

Answer 11

one product or mix, fixed and unit variable costs constant at all levels, sales prices constant, production = sales

Question 12

Constant mix assumption

Answer 12

same product mix or all products have the same C/S ratio - allows to calculate weighted average contribution per mix

Question 13

Calculating breakeven volume and revenue

Answer 13

1. Calculate contribution per unit,
2. Calculate contribution per mix (mix proportions given),
3. Calculate b/e volume = fixed costs / mix contribution,
4. Calculate no. of units of each product,
5. Calculate revenue required = volume x price.

Question 14

C/S for multiple product - volume and revenue

Answer 14

1. Calculate revenue and contribution per mix,
2. Calculate C/S of mix,
3. Calculate revenue = fixed costs / (C/S),
4. Calculate sales ratio of various products = product 1 revenue / mix revenue (%)
5. Calculate revenue per product.

Question 15

Target profit for multiple products

Answer 15

• fixed costs + target profit = total (target) contribution earned
• no. of mixes = total contribution / contribution per mix
• as product mix changes, so does mix C/S, which impacts b/e revenue, volume and profit earned
• margin of safety - same as in single product, but calculated in terms of no. of mixes and then expressed as $ or % of budgeted revenue

Question 16

Multi-product P/V chart

Answer 16

drawn for a mix and then add a dotted line for product sequence (according to C/S ratio) and also include table with breakdown of each product contribution.

Question 17

Breakeven (CVP) analysis - limitations

Answer 17

• fixed costs are assumed same at all levels of activity -> most fixed costs are step costs,
• variable costs per unit assumed constant -> (dis)economies of scale usually apply,
• the above assumptions apply to relevant range of output - breakeven and target profit are assumed to lie within that range,
• sales prices may not be constant at all levels of activity -> supply/demand dynamics,
• production = sales -> inventory changes are ignored,
• there is uncertainty in all estimates.

Question 18

Breakeven (CVP) analysis - advantages

Answer 18

• graphical presentation is more accessible to non-financial management,
• allows for assessment at every level of activity,
• C/S ratio allows to individually judge products,
• margin of safety gives indication about level of risk.