23 4.3 Cost-Volume-Profit Analysis for Multiple-Product and Service Companies

• Last updated
Dec 28, 2020
• Anonymous
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Learning Objectives

• Perform cost-volume-profit analysis for multiple-product and service companies.

Question: Although the previous section illustrated cost-volume-profit (CVP) analysis for companies with a single product easily measured in units, most companies have more than one product or perhaps offer services not easily measured in units. Suppose you are the manager of a company called Kayaks-For-Fun that produces two kayak models, River and Sea. What information is needed to calculate the break-even point for this company?

Finding the Break-Even Point and Target Profit in Units for Multiple-Product Companies

Question: Given the information provided for Kayaks-For-Fun, how will the company calculate the break-even point?

Break-Even Point in Unit and Weighted Average Contribution Margin per Unit

Question: Because most companies sell multiple products that have different selling prices and different variable costs, the break-even or target profit point depends on the sales mix. What is the sales mix, and how is it used to calculate the break-even point?

 

Target Profit in Units

Question: We now know how to calculate the break-even point in units for a company with multiple products. How do we extend this process to find the target profit in units for a company with multiple products?

 

Review problem 4.2

International Printer Machines (IPM) builds three computer printer models: Inkjet, Laser, and Color Laser. Information for these three products is as follows:

Inkjet Laser Color Laser Total
Selling price per unit $250$400 $1,600 Variable cost per unit$100 $150$800
Expected unit sales (annual) 12,000 6,000 2,000 20,000
Sales mix
60 percent 30 percent 10 percent 100 percent

Total annual fixed costs are $5,000,000. Assume the sales mix remains the same at all levels of sales 1. How many printers in total must be sold to break even? 2. How many units of each printer must be sold to break even?   Finding the Break-Even Point and Target Profit in Sales Dollars for Multiple-Product and Service Companies A restaurant like Applebee’s, which serves chicken, steak, seafood, appetizers, and beverages, would find it difficult to measure a “unit” of product. Such companies need a different approach to finding the break-even point. Figure 6.4 illustrates this point by contrasting a company that has similar products easily measured in units (kayaks) with a company that has unique products (meals at a restaurant) not easily measured in units. Direct Materials Break-Even Points in Sales Dollars and Weighted Average Contribution Margin Ratio Question: For companies that have unique products not easily measured in units, how do we find the break-even point? Question: We have the contribution margin ratio for each department, but we need it for the company as a whole. How do we find the contribution margin ratio for all of the departments in the company combined?   Target Points in Sales Dollars Question: How do we find the target profit in sales dollars for companies with products not easily measured in units?   Important Assumptions Question: Several assumptions are required to perform break-even and target profit calculations for companies with multiple products or services. What are these important assumptions? Margin of Safety Question: Managers often like to know how close expected sales are to the break-even point. As defined earlier, the excess of projected sales over the break-even point is called the margin of safety. How is the margin of safety calculated for multiple-product and service organizations? Key Takeaway 1. The key formula used to calculate the break-even or target profit point in units for a company with multiple products is as follows. Simply set the target profit to$0 for break-even calculations, or to the appropriate profit dollar amount for target profit calculations.
Total fixed costs + Target profit                                         (4.3.13)
Weighted average contribution margin per unit

2. The formula used to find the break-even point or target profit in sales dollars for companies with multiple products or service is as follows. Simply set the “Target Profit” to $0 for break-even calculations, or to the appropriate profit dollar amount for target profit calculations: Total fixed costs + Target profit (4.3.14) Weighted average contribution margin ratio Review problem 4.3 Ott Landscape Incorporated provides landscape maintenance services for three types of clients: commercial, residential, and sports fields. Financial projections for this coming year for the three segments are as follows: Assume the sales mix remains the same at all levels of sales. 1. How much must Ott Landscape have in total sales dollars to break even? 2. How much must Ott Landscape have in total sales dollars to earn an annual profit of$1,500,000?
3. What is the margin of safety, assuming projected sales are \$5,000,000 as shown previously?

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Definitions

1. The proportion of one product’s sales to total sales.
2. Calculated by multiplying each product’s unit contribution margin by the product’s proportion of total sales.
3. The total contribution margin divided by total sales.