**Warning**: Trying to access array offset on value of type null in

**/home/palanfou/evarsity.my/wp-content/themes/buddyboss-theme/learndash/ld30/topic.php**on line

**165**

# Multi-product analysis

**Warning**: Attempt to read property "post_author" on null in

**/home/palanfou/evarsity.my/wp-content/themes/buddyboss-theme/learndash/ld30/topic.php**on line

**196**

Cost-volume-profit (CVP) analysis is a helpful tool regardless of the number of products a company sells. CVP analysis is more complex with multiple products. Two complications are encountered when companies sell multiple products. First, companies rarely sell the same number of units of each product. Second, most products differ in their selling price and variable cost per unit. Therefore, in order to determine sales levels at breakeven or target profit levels, these two issues must be addressed.

__Using the Profit Equation with Multiple Products__

In order to consider the sales mix when calculating the breakeven point in units for multiple products, you must determine a *weighted average* contribution margin amount, which considers the differing selling prices, variable costs per unit, and number of units for each products.

When calculating the breakeven point or target profit in *units*, use the weighted average contribution margin (WACM) per *unit*. When calculating the breakeven point in *sales dollars*, use the weighted average contribution margin *ratio* (WACMR). The table below summarizes which contribution margin amount to use when calculating the breakeven point or target profit for single and multiple products.

**Breakeven Point in Units**

The weighted average contribution margin (WACM) per unit calculation considers the unit sales mix of all of a company’s products. Consider the budgeted income statement for Jama Giants for its two products for the month of May:

The respective contribution margin ratios are:

Donuts: $0.55 / $1.00 = 55%

Muffins: $0.60 / $2.00 = 30%

If Moe’s sells only one unit of product, as is the case with Andy, Moe’s should ‘push’ the product with the highest contribution margin *per unit* to generate the highest profit. Moe’s will generate $0.60 on one muffin compared to $0.55 on one donut, so the muffin should be ‘pushed’ to Andy.

Because Barney is willing to spend a fixed amount of money, the company should push the product that generates the largest contribution from each *sales dollar*, i.e., use the contribution margin *ratio*. Of the $2 that Barney plans to spend, Moe’s should push donuts because out of each $2 of revenue, the sale will generate $1.10 of profit (55% times $2). The sale of $2 of muffins will generate only $0.60 of profit (30% times $2).

**Walk Through Problem**

PopARoo sells two flavors of popcorn – chocolate and caramel, both sold in 1-pound bags. Information on sales for July follow:

Determine the number of units and sales revenue for each product at the breakeven point for PopARoo. The sales mix is expected to remain steady.

__Solution__

Breakeven point in units

**Step 1:** Calculate the weighted average contribution margin per *unit* which will be used in the profit equation:

WACM/unit = ($132,000 – $42,000) / 15,000 = $6.00 per bag

**Step 2:** Determine the breakeven point in units for the entire company. Because you are calculating the breakeven point in *units*, you will use the WACM per *unit* in the profit equation:

6.00x – 54,000 = 0

x = 9,000 total bags

The 9,000 units represents the total chocolate and caramel popcorn bags that the company will sell at breakeven.

**Step 3:** Determine the sales mix to be used to determine how many of the 9,000 *units* (bags) will be sold for each product. Because you are determining number of units (bags of popcorn), you will calculate the *unit* sales mix. PopARoo sells 9,000 bags of chocolate popcorn for every 6,000 bags of caramel popcorn. Reducing this to lowest terms, the company sells 3 bags of chocolate to every 2 bags of caramel popcorn:

Unit sales mix: 9,000: 6,000 ==>3 : 2

**Step 4: **Determine the number of bags of each popcorn flavor that PopARoo will sell at breakeven. Each ‘bundle’ of bags sold consists of 5 bags, with 3 of these being chocolate and 2 being caramel. As such, 3 of 5 bags, or 3/5 of the total bags sold are chocolate, and 2 of 5 bags, or 2/5 of total bags to be sold are expected to be caramel:

Chocolate popcorn = 9,000 x 3/5 = 5,400 bags

Caramel popcorn = 9,000 x 2/5 = 3,600 bags

Breakeven point in sales revenue

**Step 1:** Calculate the weighted average contribution margin ratio which will be used in the profit equation:

WACMR = ($132,000 – $42,000) / $132,000 = 68.18182%

**Step 2:** Determine the breakeven point in sales revenue for the entire company. Because you are calculating the breakeven point in revenue dollars, you will use the WACM*R* in the profit equation:

0.6818182x – 54,000 = 0

$x = $79,200

The $79,200 represents the total revenue the company will report for both chocolate and caramel popcorn bags at breakeven.

**Step 3:** Determine the sales mix to be used to determine the portion of the $79,200 of *sales revenue* that will be generated by each product. Because you are determining *revenue*, you will calculate the *revenue* sales mix. PopARoo generates $72,000 of revenue for chocolate popcorn for every $60,000 of caramel popcorn. Reducing this to lowest terms, the company generates revenue of $6 for chocolate to every $5 of revenue for caramel popcorn:

Revenue sales mix: $72,000 : $60,000 ==> $6 : $5

**Step 4: **Determine the sales revenue of each popcorn flavor that PopARoo will generate at breakeven. Each ‘bundle’ of sales consists of $11 of revenue, with $6 of this for chocolate and $5 for caramel. As such, $6 of $11 of revenue, or 6/11 of the total revenue is for chocolate, and $5 of $11 of revenue, or 5/11 of total revenue is for caramel:

Chocolate popcorn = $79,200 x 6/11 = $43,200

**SELF-CHECK ACTIVITY **

- Describe the multiple product analysis in CVP analysis?