Accounting Cost-Volume-Profit Analysis
4.2. Contribution margin technique in multiple-product companies
The logic to calculate sales required for a designed profit for a multiple-product company is the same as for a single-product company. In the formula for determining the sales required for a desired profit, we just substitute the contribution margin per unit for one product with the weighted average contribution margin for multiple products.
The formula to calculate the required unit sales for a given desired profit is shown below:
Unit Sales = |
Fixed Costs + Target Profit |
Weighted Average Contribution Margin per Unit |
And the amount of sales in dollars can be determined by using the following formula:
Sales (Dollars) = |
Fixed Costs + Target Profit |
Contribution Margin Ratio |
5. Graphical representation of break-even point and break-even analysis
CVP analysis can also be presented graphically. The illustration below shows the break-even point for Friends Company for a single-product situation:
Illustration 1: Graphical representation of a break-even point and break-even analysis
In the graph of the break-even point representation, sales and costs are shown on the vertical axis (Y) and units sold are shown on the horizontal axis (X). The fixed costs line starts at $10,000 for zero units sold and remains unchanged regardless of increases in units sold. This happens because fixed costs don't change with the production level. The sales line starts at zero dollars when zero units are sold and increases as more and more units are sold. The exact increase is $5 per each additional unit because the selling price for one valve is $5. The total costs line starts at $10,000 for zero units sold because at that level, only fixed costs of $10,000 are incurred. As the company starts selling valves, the total costs increase by $3 for each additional unit because the variable costs per unit are $3 per unit.
The break-even point is where total costs equal sales. Recall a break-even point is a no-profit situation, which occurs when sales equal costs. You can see that the break-even point for Friends Company is 5,000 units or $25,000 in sales.
At any point below the break-even mark, the company will have a loss because total costs exceed sales. Vice versa, at points above the break-even mark, the company will have a profit because total costs are lower than sales. The loss and profit areas are shown on the graph in red and green colors, respectively.