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Multiple Product Analysis for Managerial Accounting Mcom Delhi University
Multiple Product Analysis for Managerial Accounting Mcom Delhi University:- we will provide complete details of Multiple Product Analysis for Managerial Accounting Mcom Delhi University in this article.
Multiple Product Analysis for Managerial Accounting Mcom Delhi University
The determination of the break-even point in CVP analysis is easy once the variable and fixed components of costs have been determined.
A problem arises when the company sells more than one type of product. Break-even analysis may be performed for each type of product if fixed costs are determined separeately for each product.
owever, fixed costs are normally incurred for all the products hence a need to compute for the composite or multi-product break-even point.
Multi-Product Break-Even Point Formula
In computing for the multi-product break-even point, the weighted average unit contribution margin and weighted average contribution margin ratio are used.
| BEP in units | = | Total fixed costs |
Weighted average CM per unit |
| BEP in dollars | = | Total fixed costs |
Weighted average CM ratio |
Example
Belle Company manufactures and sells three products: Products A, B, and C. The following data has been provided the company.
A | B | C | |||
| Selling price | $100 | $120 | $50 | ||
| Variable cost per unit | 60 | 90 | 40 | ||
| Contribution margin per unit | 40 | 30 | 10 | ||
| Contribution margin ratio | 40% | 25% | 20% |
The company sells 5 units of C for every unit of A and 2 units of B for every unit of A. Hence, the sales mix is 1:2:5. The company incurred in $120,000 total fixed costs.
1. Multi-product break-even point in units
| BEP in units = | Total fixed costs |
Weighted average CM per unit | |
$120,000 | |
$18.75 | |
| BEP in units = | 6,400 units |
a. Computation of weighted average CM per unit:
| ∑(CM per unit x Unit sales mix ratio) | |
| Product A ($40 x 1/8) | $ 5.00 |
| Product B ($30 x 2/8) | 7.50 |
| Product C ($10 x 5/8) | 6.25 |
| WA CM per unit | $18.75 |
The weighted average CM may also be computed by dividing the total CM by the total number of units.
| WA CM per unit = | (40×1)+(30×2)+(10×5) | = 18.75 |
8 |
b. Breakdown of the break-even sales in units:
| (B-E point x Unit sales mix ratio) | |
| Product A (6,400 units x 1/8) | 800 units |
| Product B (6,400 units x 2/8) | 1,600 |
| Product C (6,400 units x 5/8) | 4,000 |
| Total | 6,400 units |
The company must produce and sell 800 units of Product A, 1,600 units of Product B, and 4,000 units of Product C in order to break-even.
2. Multi-product break-even point in dollars
| BEP in dollars = | Total fixed costs |
Weighted average CM ratio | |
$120,000 | |
25.4237% | |
| BEP in dollars = | $472,000 |
a. Computation of weighted average CM ratio:
| ∑(CMR x Sales revenue ratio) | |
| Product A (40% x 100/590) | 6.7797% |
| Product B (25% x 240/590) | 10.1695% |
| Product C (20% x 250/590) | 8.4745% |
| WA CM per unit | 25.4237% |
Take note that this time, the ratio used is developed from the ratio of individual sales to total sales.
| Product A (100×1) | 100 |
| Product B (120×2) | 240 |
| Product C (50×5) | 250 |
| Total Sales | 590 |
The weighted average CM may also be computed by dividing the total CM by the total sales.
| WA CM ratio = | (40×1)+(30×2)+(10×5) |
(100×1)+(120×2)+(50×5) | |
| WA CM ratio = | 25.4237% |
b. Breakdown of the break-even sales revenue:
| (B-E point x Sales revenue ratio) | |
| Product A ($472,000 x 100/590) | $ 80,000 |
| Product B ($472,000 x 240/590) | 192,000 |
| Product C ($472,000 x 250/590) | 200,000 |
| Total | $472,000 |
The company must generate sales of $80,000 for Product A, $192,000 for product B, and $200,000 for Product C, in order to break-even. Alternatively, these can be computed by multiplying the individual break-even point in units for each product by their corresponding selling price, i.e. 800 units x $100 for Product A = $80,000, 1,600 units x $120 for Product B = $192,000, and 4,000 units x $50 for Product C = $200,000.
Multiple Product Analysis for Managerial Accounting Mcom Delhi University
The method of calculating break-even point of a single product company has been discussed in the break-even point analysis article. In this article, I would explain the procedure of calculating break-even point of a multi product company. A multi-product company means a company that sells two or more products.
The procedure of computing break-even point of a multi product company is a little more complicated than that of a single product company.
Formula:
A multi product company can compute its break-even point using the following formula:
For computing break-even point of a company with two or more products, we must know the sales percentage of individual products in the total sales mix. This information is used in computing weighted average selling price and weighted average variable expenses.
In the above formula, the weighted average selling price is worked out as follows:
(Sale price of product A × Sales percentage of product A) + (Sale price of product B × Sale percentage of product B) + (Sale price of product C × Sales percentage of product C) + …….
and the weighted average variable expenses are worked out as follows:
(Variable expenses of product A × Sales percentage of product A) + (Variable expenses of product B × Variable expenses of product B) + (Variable expenses of product C × Sales percentage of product C) + …….
When weighted average variable expenses per unit are subtracted from the weighted average selling price per unit, we get weighted average contribution margin per unit. Therefore, the above formula can also be written as follows:
An example would be very helpful to understand the whole procedure. Consider the following example of a multi product company:
Example:
The Monster company manufactures three products – product X, product Y and product Z. The variable expenses and sales prices of all the products are given below:
The total fixed expenses of the company are $50,000 per month. For the coming moth. Monster expects the sale of three products in the following ratio:
Product X: 20%;
Product Y: 30%;
Product Z: 50%
Required: Compute the break-even point of Monster company in units and dollars for the coming month.
Solution:
Monster company sells three products and is, therefore, a multi product company. Its break-even point can be computed by applying the above formula:
= $50,000 / $95* – $55**
= $50,000 / $40
= 1,250 units
*Weighted average selling price:
= ($200 × 20%) + ($100 × 30%) + ($50 × 50%)
= $40 + $30 + $25
= $95
**Weighted average variable expenses:
= ($100 × 20%) + ($75 × 30%) + ($25 × 50%)
= $20 + 22.50 + 12.50
= $55
The company will have to sell 1,250 units to break-even. Now I would compute the number of units of each product to be sold:
Product X (1,250 × 20%): 250 units
Product Y (1,250 × 30%): 375 units
Product Z (1,250 × 50%): 625 units
Total:250 units + 375 units + 625 units = 1,250 units
As the number of units of each individual product to be sold have been computed, I can compute the break even point in dollars as follows:
The break-even point of Monster company is $118,750. It can be verified by preparing a contribution margin income statement as follows:
Multiple Product Analysis for Managerial Accounting Mcom Delhi University
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