Our Recommendations :-
Follow FB Page Facebook


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
Important Note – Preparing for MCom?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
Watch Sample Video Now by clicking on the link(s) below – 
For any questions Request A Call Back  
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:

break-even-analysis-with-multiple-products-img1

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:

break-even-analysis-with-multiple-products-img2

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:

break-even-analysis-with-multiple-products-img3

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:

break-even-analysis-with-multiple-products-img1

= $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:

break-even-analysis-with-multiple-products-img4

The break-even point of Monster company is $118,750. It can be verified by preparing a contribution margin income statement as follows:

break-even-analysis-with-multiple-products-img5

Multiple Product Analysis for Managerial Accounting Mcom Delhi University

CAKART provides India’s top M.COM faculty video classes – online Classes – at very cost effective rates. Get M.COM Video classes from CAKART.in to do a great preparation for your exam.

 Watch M.COM Economics sample video lectures Here

Watch M.COM Accounting Sample video lecture Here

Watch M.COM Mathematics Sample video lecture Here

For any questions chat with us by clicking on the chat button below or give a missed call at 9980100288

About Author: vinay karwasra

Leave a Reply

Your email address will not be published. Required fields are marked *

Chat with a counsellor
SIGN UP