23 4.3 CostVolumeProfit Analysis for MultipleProduct and Service Companies

Last updated
 Dec 28, 2020
Learning Objectives
 Perform costvolumeprofit analysis for multipleproduct and service companies.
Question: Although the previous section illustrated costvolumeprofit (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 KayaksForFun that produces two kayak models, River and Sea. What information is needed to calculate the breakeven point for this company?

 Finding the BreakEven Point and Target Profit in Units for MultipleProduct Companies
Question: Given the information provided for KayaksForFun, how will the company calculate the breakeven point?


BreakEven 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 breakeven or target profit point depends on the sales mix. What is the sales mix, and how is it used to calculate the breakeven point?
Target Profit in Units
Question: We now know how to calculate the breakeven 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

 How many printers in total must be sold to break even?
 How many units of each printer must be sold to break even?
Finding the BreakEven Point and Target Profit in Sales Dollars for MultipleProduct 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 breakeven 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 BreakEven 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 breakeven 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 breakeven 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 breakeven point. As defined earlier, the excess of projected sales over the breakeven point is called the margin of safety. How is the margin of safety calculated for multipleproduct and service organizations?
Key Takeaway
 The key formula used to calculate the breakeven or target profit point in units for a company with multiple products is as follows. Simply set the target profit to $0 for breakeven calculations, or to the appropriate profit dollar amount for target profit calculations.
2. The formula used to find the breakeven 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 breakeven calculations, or to the appropriate profit dollar amount for target profit calculations:
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.
 How much must Ott Landscape have in total sales dollars to break even?
 How much must Ott Landscape have in total sales dollars to earn an annual profit of $1,500,000?
 What is the margin of safety, assuming projected sales are $5,000,000 as shown previously?

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