Chapter 3 CostVolumeProfit Analysis Breakeven point Dr Mohamed
Chapter 3 Cost-Volume-Profit Analysis Breakeven point…. Dr. Mohamed Mousa 1 -1
Effects of Sales Mix on CVP : Sales Mix is the quantity or proportion of various products or services that constitute a company’s total unit sales. It is often the case that the various products or services have different contribution margins. Up to this point, we’ve assumed a single product; more realistically, we’ll have multiple products with different costs and different margins. Dr. Mohamed Mousa
Effects of Sales Mix on CVP : We can use the same formula in our CVP calculations but must use an average contribution margin for the products. This technique assumes a constant mix at different levels of total unit sales. Dr. Mohamed Mousa
Example no 1: q. Magi Industrial Company produces the products( x & y & z )and you have the following data: Description x y z Sales revenue 60000 100000 40000 Unit Sale Price 30 20 16 Variable Cost / u 24 15 11, 2 Sales mix ratio 30% 50% 20% Dr. Mohamed Mousa
Example no 1: q. If you know that the fixed costs of the company is 19600 $. q. Required : 1. Determine the quantity and value of the B. E. P of each product. 2 - What is the sales number required to achieve a target profit capacity of 49000 $? Dr. Mohamed Mousa
Solution 1. Determine the weighted average return on contribution of the unit: Product S. P V. C. U C. M. R S. M. R Average Contribution x 30 24 6 20% 30% 0, 060 y 20 15 5 25% 50% 0, 125 z 16 11, 2 4, 8 30% 20% 0, 060 Total - - 100% 0, 245 Dr. Mohamed Mousa
Solution 2 - The Value of B. E. P To the company as a whole: B. E. PR = F. C / Total Average Contribution = 19600 / 0, 245 = 80000 $ v the value of B. E. P per product: = The value of B. E. P To the company as a whole × sales mix ratio. Dr. Mohamed Mousa
Solution Ø B. E. P R To Product x = 80000 x 30% = 24000 $. Ø B. E. P u To Product x = 24000 $ / 30 (s. p) = 800 Unit. ü B. E. P R To Product y = 80000 x 50% = 40000 $. ü B. E. P u To Product y = 40000 $ / 20 (s. p) = 2000 Unit. q B. E. P R To Product z = 80000 x 20% = 16000 $. q B. E. P u To Product z = 16000$ / 16(s. p) = 1000 Unit. Dr. Mohamed Mousa
Solution 3 – The B. E. P R that earn a profit of 49000 $ : = ( F. C + O. I ) / Total Average Contribution = (19600 + 49000 ) / 0, 245 = 280000 $ v the value of sales that earn a profit per product: = The B. E. P R that earn a profit To the company as a whole × sales mix ratio. Dr. Mohamed Mousa
Solution Ø V. S. P To Product x = 280000 x 30% = 84000 $. Ø N. S. P To Product x = 84000 $ / 30 (s. p) = 2800 Unit. ü V. S. P To Product y = 280000 x 50% = 140000 $. ü N. S. P To Product y = 140000 $ / 20 (s. p) = 7000 Unit. q V. S. P To Product z = 280000 x 20% = 56000$. q N. S. P To Product z = 56000$ / 16(s. p) = 3500 Unit. Dr. Mohamed Mousa
Exercises: ( Case Study ) q. ZAAT Industrial Company produces the products( K & L & M )and you have the following data: Description K L M Unit Sale Price 50 25 90 Variable Cost / u 30 19 72 Number of units sold 6000 4000 10000 Dr. Mohamed Mousa
Exercises : q. If you know that the fixed costs of the company is 166800 $. q. Required : 1. Determine the quantity and value of the B. E. P of each product. 2 - What is the sales number required to achieve a target profit capacity of 133200 $? Dr. Mohamed Mousa
CVP for Service and Not-For-Profit Organizations : CVP isn’t just for merchandising and manufacturing companies. Service and Not-For-Profit businesses need to focus on measuring their output which is different from the units sold that we’ve been dealing with. For example, a service agency might measure how many persons they assist or an airline might measure how many passenger miles they fly. What measure might a hotel use? A restaurant?
Contribution Margin versus Gross Margin : Recall from Chapter 2 that Gross Margin = Revenue – Cost of Goods Sold. In Chapter 3, we learned about Contribution Margin which is Revenue – All Variable Costs. Gross Margin measures how much a company charges for its products over and above the cost of acquiring or producing them. Contribution Margin indicates how much of a company’s revenue is available to cover fixed costs. This is especially significant in the manufacturing sector where businesses carry inventory.
The Next Lecture Chapter 6 “ The Master Budget and Responsibility accounting “ Dr. Mohamed Mousa 1 -15
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