Unit 1: Cost-Volume-Profit Analysis Economics Worksheet With Answers - Cma311s Notes, 2010 Page 7
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27Cost-volume-profit analysis: Multi-products
In today’s complex production times no company produces a single product only. In other words, the
previous discussions based on a single product were too simplistic. Often companies produce and sell more
than one product. Breakeven analysis under these circumstances is somewhat more complex than discussed
earlier in this chapter. The reason is that different products will have different selling prices, different costs,
and different contribution margins. Consequently the breakeven point will depend on the mix in which the
different products are sold.
Businesses try to achieve the combination (or mix) that will yield the greatest amount of profits. Most
companies produce several products and often these products are not equally profitable. Where this is true,
profits will depend to some extent on the company’s sales mix. Profits will be greater if high-margin rather
than low-margin items make up a relatively large proportion of total sales.
Changes in sales mix can cause interesting variations in a company’s profits. A shift in the sales mix from
high margin items to low margin items can cause total profits to decrease even though total sales may
increase. Conversely, a shift in the sales mix from low margin items to high margin items can cause total
profits to increase even though total sales may decrease. It is one thing to achieve a particular sales volume;
it is quite a different thing to sell the most profitable mix of products!
Calculation of break-even point in units
You will recall from the previous paragraphs above that the break-even point in units is calculated as
follows:
Total fixed costs
Break-even point in units = Contribution per unit
When there is more than one product, the formula is adjusted as follows:
Total fixed costs
Break-even point in units = Average contribution per unit
Example 3
Hangana Ltd supplied the following information regarding its three products:
Product A
Product B
Product C
Sales in units
2 000
3 000
5 000
Selling price per unit
N$20
N$50
N$40
Variable cost per unit
N$16
N$36
N$28
Total fixed cost = N$77 000
Required:
Compute the company’s break-even point in units.
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