Cost Volume Profit Part3

ACCA F5 - Performance Management 

So far, we see how to cope CVP problems for business producing one type of products. However, in real world firms often produce range of products. Example: a typical Indian sweet shop produces varieties of sweets. Now, we increase the complexity level. Say, type1 sweet is sold for Rs 10 per piece, type2 two sweet Rs 200 per kg, type3 sweet Rs 30 per liter and so on. Then, how do we calculate breakeven point for the sweet shop. Trouble hovers around.

5.2 Multiple product scenarios (following paragraphs is form page 8 of article linked below)

Break-even analysis can also be used to work out either a break-even volume or revenue, given a multiple product scenario. This is achieved using the 'average contribution per unit' or 'average C/S ratio per unit' (as I like to call "weighted average contribution per unit" or "weighted average C/S ratio per unit") for all products together. Any Change in mix will change C/S ration or contribution per unit of the mix of the products; hence, recalculation is needed to find revised break-even volume or revenue.

Back to sweet shop example, now if we know the product mix consist of 5pieces type1 sweet cost at Rs5 per piece, 0.5kg type2 two sweet cost at Rs 60 per kg, 2ltr type3 sweet Rs 20 per liter and so on. This way we simplified the complex situation. Now the product mix represents one product and for a single product, we know how to calculate breakeven. Just we need to know is to use weighted figures. In addition, if the mix changes, we recalculate.

Using Excel

In exam questions, product mix does not change. But in real life managers would like to find the changing effect of product mix. This means the more different possible mix is identified, that many times work needs to be repeated? What a fuss?  Anyway no need to bother about repeating same task for number of times. Excel does it all for you. Just you need to know how to use scenario manager. In Excel 2007 you can find it in Data ribbon >What-if analysis > Scenario manager.

Chapter 5: Break-even analysis (CVP analysis)