You are on page 1of 24

Sales Mix

Effect of sales mix on CVP analysis.

Unit contribution margin is replaced with contribution margin for a composite unit. A composite unit is composed of specific numbers of each product in proportion to the product sales mix. Sales mix is the ratio of the volumes of the various products.

Computing Multiproduct Break-Even Point


The resulting break-even formula for composite unit sales is:
Break-even point in composite units = Fixed costs Contribution margin per composite unit

Computing Multiproduct Break-Even Point


A company sells windows and doors. They sell 4 windows for every door.

Selling Price Variable Cost Unit Contribution Sales Mix Ratio

Windows Doors $200 $500 125 350 $ 75 $ 150 4 1

Computing Multiproduct Break-Even Point


Step 1: Compute contribution margin per composite unit.
Selling Price Variable Cost Unit Contribution Sales Mix Ratio Composite C/M Windows Doors $200 $500 125 350 $ 75 $ 150 4 1 $300 $150

Computing Multiproduct Break-Even Point


Step 2: Compute break-even point in composite units. Fixed costs Break-even point = Contribution margin in composite units per composite unit

Computing Multiproduct Break-Even Point


Step 2: Compute break-even point in composite units.
Break-even point in composite units
Break-even point in composite units Break-even point in composite units Fixed costs Contribution margin per composite unit Rs.900,000

Rs.450 per composite unit


2,000 composite units

Computing Multiproduct Break-Even Point


Step 3: Determine the number of windows and doors that must be sold to break even.

Sales Composite Product Mix Units Window 4 2,000 = Door 1 2,000 =

Units 8,000 2,000

Multiproduct Break-Even Income Statement


Step 4: Verify the results.

Windows Selling Price $200 Variable Cost 125.00 Unit Contribution $ 75.00 Sales Volume 8,000 Total Contribution $ 600,000 Fixed Costs Income

Doors $500 350.00 $ 150.00 2,000 $ 300,000

Combined

$ 900,000 900,000 $ 0

Case Study
Multi products Company has a sales ratio of 2:3:5 for models X, Y and Z respectively. Total fixed cost for the year are Rs 200000.The sale price, variable cost and contribution margin associated with each product are as follows: M-X M-Y M-Z Sales Price 50 25 10 Variable Cost 30 15 8 Contribution 20 10 2 Find out composited BEP and the no. of individual product required at B.E.P is then determined.

Case the no. of individual product required at B.E.P is then determined.


M-X Sales Price 50 Variable Cost 30 Contribution 20 Sales Mix 2 Total contribution 40 M-Y 25 15 10 3 30 M-Z 10 8 2 5 10

80

Computing Multiproduct Break-Even Point


Step 2: Compute break-even point in composite units.
Break-even point in composite units
Break-even point in composite units Break-even point in composite units Fixed costs Contribution margin per composite unit Rs200,000

Rs.80 per composite unit


2500 composite units

the no. of individual product required at B.E.P is then determined.


In order to fill 2500 baskets, it will take the following Units for each model. Model X =2500 x 2=5000 units Model Y = 2500 x 3 = 7500 units Model Z = 2500 x 5 = 12500 units

Limiting of key factor


A limiting or key factor may be defined as the factor in the activities of an undertaking, which at a particular point in time or over a period will limit the volume of output. Examples of limiting factors are: Sales Materials Labour Production capacity/machine hours Financial resources

Example:Product Contribution per unit A Rs.15 B Rs.20

Which Product will be more profitable A or B??

Contribution per unit of key factor


Product Contribution per unit A Rs.15 B Rs.20

Product B , will be more profitable

Contribution per unit of key factor


Product Contribution per unit Material required per unit Contr. per kg of material A Rs.15 3kg Rs.5 B Rs.20 5kg Rs.4

Product A, will be more profitable

Limiting Key Factor-Material


Lets take an example that the material available is only 15000 kg A B No. of units that 5000 3000 can be produced Contribution 65000 60000

Product A, is more profitable

Problem:The following particulars are extracted from the records of a company A B Selling Price (per unit) 100 120 Consumption of material p.u 2kg 3Kg Material Cost Rs. 10 Rs. 15 Direct Wages Rs. 15 Rs.10

Problem:Direct Expenses Machine hours used p.u Overhead expenses p.u: Fixed Rs. 5 Variable Rs. 15 Direct wages per hour is Rs.5 A 5 3 B 6 2 Rs. 10 Rs. 20

Problem
a) Comment on the profitability of each product (both use the same raw material) when: 1. Total Sales potential in units is limited 2. Total Sales Potential in value is limited 3. Raw material is in short supply and 4. Production capacity in terms of machine hours) is the limiting factor. b) Assuming raw material as the key factor, availability of which is 10000 kg and maximum sales potential of each product being 3,500 units, find out the product mix which will yield the maximum profit

Solution

Statement of Marginal Cost and Contribution


Sales Less:- Marginal Cost Direct Material Direct Wages Direct Expenses Variable OHD A Rs.100 10 15 5 15 B Rs.120 15 10 6 20 51 69 57.5% 23 34.5

45 Contribution 55 P/V Ratio 55% Contribn per kg of material 27.5 Contribn per machine hour 18.3

Comments
1.

2. 3.

4.

B is more profitable as its making a larger contribution per unit as compared to A B is more profitable as its P/V ratio is more A is more profitable as its contribution per kg of material is more B is more profitable as it makes larger contribution per machine hour

Solution
b) When Raw material is key factor. A is more profitable to produce as its contribution per kg of material is higher than B. For 3500 units of A-material consumed will be 3500 x 2 kg=7000 Kg. The balance 3000 kg can be used to produce 1000 units(3000kg/3) of B. Thus the product mix is 3500 units of A and 1000 units of B

You might also like