Management Accounting

Study Unit 5.2 – Cost volume profit analysis(Multiple

products)

Mrs Neo Molefi-Kau

Office: A3, First floor, Block A, Office 138
Tel no.: 018 389 2640
Email: Neo.Kau@nwu.ac.za
 Study outcomes
• On completion of this study unit you should be able to:
• Compute the break-even point in units and rand in
organisations selling more than one type of product.
• Compute the turnover in units and rand to reach a
target net income in organisations selling more than
one type of product.
• Compute the net income in organisations with more
than one type of product when a change in sales mix
occur.
• Determine a sales and production mix to maximise the
profit in an organisation.
 Study outcomes
• On completion of this study unit you should be able to:
• Determine a sales and production mix to maximise the profit
in an organisation when a restricting factor occurs.
• Distinguish between cases where a sales mix in units is
applicable and where a sales mix in rand is applicable.
 3.1.1 Introduction
• In study unit 5.1 cost-volume-profit relationships with the emphasis on a
single product were discussed.
• In this study unit the emphasis shifts to multiple products in organisations.
• A limiting factor will have an impact on the production mix.
 3.1.2 Sales mix
• Sales mix refers to the relationship in which a company’s products are
sold.
• Only applicable at companies with more than one product.
• Certain products are more profitable than others and thus the
profitable products should be maximised.
• Please note – Assumptions are still applicable.
 3.1.3 Break-even point and multiple products
• Break-even point = Fixed costs / Contribution
• What is the contribution for multiple products?
• Use average contribution:
• Average contribution margin per unit = total contribution of the sales mix
divided by the number of units of the sales mix.
• Average contribution margin ratio = average contribution margin per unit
divided by the average selling price of the sales mix.
3.1.3 Break-even point and multiple products
• Sales mix does not stay constant and therefore a formula
should be applied to accomodate this aspect.
• Break-even = Fixed cost
(units) Ave contribution margin per unit

• Break-even = Fixed cost

(rand) Ave contribution margin ratio
 3.1.4 Target profit and multiple products
• The same formula as at study unit 2
• Target sales = Fixed costs + profit
(units) Ave contribution margin per unit

• Target sales = Fixed costs + profit

(rand) Ave contribution margin ratio
Example 1 – Break even units
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Monthly fixed costs are R108 000

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
AVG Contribution
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
AVG Contribution

R 108 000
=
R 10.80
How many units of
= 10 000 units each product?
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
AVG Contribution

R 108 000
=
R 10.80

= 10 000 units

4 2 4
=
10 10 10
Example 2 – Break even Rands
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

 Example
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18,80

Average contribution margin R 10,80

Average contribution margin % 57,4%

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

Average contribution R 10.80

How much Rand per
Average contribution % 57.4%
product?
Fixed cost R 108 000
Break even = = = R 188 000
AVG Contribution % 57.4%
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

Average contribution R 10.80

Average contribution % 57.4%

Fixed cost R 108 000

Break even = = = R 188 000
AVG Contribution % 57.4%
48 40 100
=
188 188 188
 Example – mix in %
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix in rand 30% 40% 30%

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Monthly fixed costs are R108 000

 Example
Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2,5 2 1,2 R 5,70

Contribution R 15 R 24 R 18 R 57

Average contribution R 10
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
avg Contribution
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
avg Contribution

R 114 000
=
R 10

= 11 400 units How many units of

each product?
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
avg Contribution

R 114 000
=
R 10

= 11 400 units

2,5 2 1,2
=
5,7 5,7 5,7

= 5 000 4 000 2 400

 Example
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales R 30 R 40 R 30 R 100

Sales mix 2,5 2 1,2 5,7

Average selling
price R 30 R 40 R 30 R 17,54

Average contribution R 10,00

Average contribution margin % 57%

Fixed cost R 114 000

Break even = = R 200 000
Average contribution margin
57%%
3.1.5 Contribution and restricting factors
• Restricting factors are those factors that limit an
organisation or prevents it to make unrestricted profit.
• Examples??
• The contribution per restricting factor should be
maximised.
• We are only looking at one restricting factor now – in
study unit 6 we’ll look at more than one
3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour)R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour)
R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

 3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

 3.1.5 Sales mix decision
• What is the most profitable sales mix?
• If only one restricting factor, most of the product with the highest
contribution margin per restricting factor
• More than one restricting factor, use linear programming (study unit 6)
3.1.5 Sales mix decision
• Additional info:
• Production capacity : 9600 DLH
• Budgeted sales: P=8000 units, Q=5000 units, =R4000 units.
• Most profitable sales mix?
3.1.5 Sales mix decision
• P and R is most profitable per restricting resource.
• Thus all of P must be sold : 8000 * 0.6DLH = 4800 DLH
• R must also be sold : 4000 * 1DLH = 4000 DLH
• Hours left ? 9600 – 8800= 800DLH
• Thus 800/0.8 = 1000 units of Q
• P=8,Q=1,R=4
 3.1.6 Summary
• For sales of more than one product the same principles will be
applicable as for one product:
• Break-even point calculation
• Target sales calculation
• Use only average contribution per unit and average contribution
margin percentage
• If sales mix changes, the break-even point and target sales will also
change
• Restricting factor – maximise the contribution per restricting factor
HOMEWORK
• KGB
• HIT THE BALL