Your Turn: CVP Analysis with Multiple Products

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From the course by University of Virginia

Managerial Accounting Fundamentals

35 ratings

University of Virginia

Managerial Accounting Fundamentals

35 ratings

This course will teach you the fundamentals of managerial accounting including how to navigate the financial and related information managers need to help them make decisions. You'll learn about cost behavior and cost allocation systems, how to conduct cost-volume-profit analysis, and how to determine if costs and benefits are relevant to your decisions. By the end of this course, you will be able to: - Describe different types of costs and how they are represented graphically; - Conduct cost-volume-profit analyses to answer questions around breaking even and generating profit; - Calculate and allocate overhead rates within both traditional and activity-based cost allocation systems; - Distinguish costs and benefits that are relevant from those that are irrelevant for a given management decision; - Determine a reasonable course of action, given the financial impact, for a given management decision.

From the lesson

COST-VOLUME-PROFIT ANALYSIS

Now that we've learned the fundamentals of cost behavior, we're ready to move on to discussing the relationships between cost structure, volume, price, and profit. We'll then see why these relationships matter as we conduct cost-volume-profit analyses to answer questions around breaking even and generating profit.

Week 2 Overview0:48

What Is CVP Analysis?2:12

Functional Versus Contribution Margin Income Statements4:24

Breakeven Analysis4:52

Your Turn: Breakeven Analysis Company A2:39

Your Turn: Breakeven Analysis Company B1:52

Your Turn: Breakeven Analysis Company C2:13

Your Turn: Breakeven Analysis Company D3:07

Interested in Doing More than Breakeven?3:33

Your Turn: Doing More than Breakeven Company A3:12

Your Turn: Doing More than Breakeven Company B3:05

Your Turn: Doing More than Breakeven Company C2:59

Your Turn: Doing More than Breakeven Company D2:58

CVP Analysis with Multiple Products5:18

Your Turn: CVP Analysis with Multiple Products6:33

Meet the Instructors

Luann J. Lynch
Almand R. Coleman Professor of Business Administration
Darden School of Business

Now, it's your turn to practice.

Here's the example.

Company E sells a product in two models.

The basic model has a price per unit of $100 and variable cost per unit of $60.

The deluxe model has a price per unit of $120 and variable cost per unit of $100.

Its typical sales mix is 75% basic models and 25% deluxe models.

Total fixed costs for the year are $105,000.

How many basic and deluxe units must Company E sell to break even?

Take a few minutes, give it a try, then come back and we'll see how you did.

[SOUND] [SOUND] Okay, let's take a look at the last

your turn example that we have here for this week.

We are looking at data for our basic model where we have a price of $100,

variable cost of $60 so that is a contribution margin of $40 per unit.

And then our deluxe model we have $120 price, we have variable cost of $100.

So that's a $20 contribution margin per unit.

Our organization incurs, $105,000 and fixed cost, and

the typical sales mix that we see is 75% of the units that we sell are our

basic model, and 25% of those units are our deluxe model.

Now, what we are trying to figure out is, how many of the basic models and

the deluxe models do we need to sell In order to break even?

So, let's think about how we do that.

Recall, that if we've got multiple products in a situation,

rather than just put one product, and we are using CDP analysis,

we need to be able to make the assumption that the sales mix stays constant.

So, we're going to make the assumption that we are always selling 75% of

the basic model, and 25% of the deluxe model.

And in doing that, we can calculate the average contribution margin per unit.

So that would be our first step.

So I'm going to do that right here.

The average contribution margin per unit.

75% of our models are basic and they have a contribution margin of $40.

And 25% of our models are deluxe, and they have a contribution of $20.

So the average contribution margin per unit

is $35.

Okay, let's move over here and let's substitute in what we can substitute.

Before I do any substitution though, I'm going to rearrange a little bit.

Okay, let's rearrange in to price minus variable cost per unit.

Times our quantity.

Minus our fixed cost, is equal to our profit, and

here all we're trying to do is sell enough to break even, so

I'm going to put our profit in here at 0.

And notice that this price minus the variable cost is a contribution

margin per unit.

Times the quantity, minus the fixed cost, is equal to 0.

So I'm going to substitute in what we know now.

We're looking for the number of units.

So, I'm not going to substitute anything there, but

our average contribution margin per unit is this $35.

And our fixed costs are $105,000,

and we're shooting for break even.

So our break even quantity is the $105,000 fixed cost

divided by $35 average contribution margin per unit.

So we need to sell 3,000 units in order to break even.

But remember, the original question with was, how many of the basic model and

how many of the deluxe model do we need to sell to break even?

Well, we know we need to sell 3,000 units at an average contribution margin

at $35 per unit, to break even.

This is an average contribution margin and this is a total number of units.

Well, our sales mix, recall, we assume to stay

constant at 75% basic model, 25% deluxe model.

So out of these 3,000 units,

75% of them need to be basic models.

And then, of our 3,000 units,

25% of them need to be deluxe.

So, if we sell 2,250 basic models at $100,

and 750 deluxe models at $120,

then we will exactly break even.

I think that might be a relatively straight forward for you by this point.

This was definitely the more difficult one that we tackled in the your turn segments,

but here's the next challenge for you.

What I'd like for you to do, is to spend a little bit of time and

prove to yourself that this number of basic units and this number of deluxe

units does indeed lead us to a break even situation, or profit of equal to 0.

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