Chapte r 8 - CVP for Multiple Products

# Chapte r 8 - CVP for Multiple Products - Chapte r 8 CVP for...

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Chapter 8 Multiple Product Cost-Volume-Profit Analysis Cost-volume-profit analysis is effective for companies with a single product or those with multiple products. In order to determine sales levels at break-even or target profit levels, one additional assumption beyond the basic CVP assumptions covered in chapter 7 for CVP to produce reliable results. We assume the company has a steady sales mix. Sales Mix Sales mix refers to the relative proportions in which a company’s products are sold. For example, suppose a delicatessen sells 2 sandwiches for every bag of chips to every 3 soft drinks. The sales mix in units for the deli is 2 to 1 to 3 expressed as 2 : 1 : 3. Out of every 6 items sold, the company typically sells 2 sandwiches, 1 bag of chips, and 3 soft drinks. Knowing this information is helpful for budgeting and for managing a company's inventory levels. Suppose Jama Giants produces two products: cakes and pies. Customers prefer to buy one item during each visit, and their choice is not affected by the respective selling price. Jama Giants provides the following budget for its products for the month of May: Cakes Pies Total Budgeted Units to be Sold 2,000 6,000 8,000 Sales revenue \$24,000 \$36,000 \$60,000 Variable cost 4,500 10,800 15,300 Fixed costs 6,000 5,400 11,400 Profit \$13,500 \$19,800 \$33,300 Sales mix can be stated two different ways, in terms of units and in terms of sales dollars. Note that a total of 8,000 units are budgeted to be sold. The sales mix based on units is 2000 to 6000 units. However, this must be reduced to lowest terms, a concept you learned many times in middle school math classes. Reducing it to lowest terms, the sales mix in units is 1 to 3: 2000 : 6000 1 : 3 The unit sales mix tells us that Jama Giants sells one cake for every three pies sold. The company's sales mix based on sales dollars is determined in much the same manner by comparing revenues of each product and then reducing to lowest terms. 24000 : 36000 = 2 : 3 The revenue sales mix tells us that Jama Giants sells \$2 of cakes for every \$3 of pies. Which Product Should We Sell? Companies prefer to sell products that produce the highest contribution to profit. However, there are a number of terms that describe profit. We can calculate at a company's profit margin ratio by comparing the amount of profit to sales revenue. Profit margin tells us how much out of every sales dollar contributes to the profit of a company. It represents the profit left after both fixed and variable costs have been deducted. The contribution margin ratio tells us how much of every sales dollar is available to

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