1. Chapter 3 Cost-Volume-Profit Analysis Breakeven point….
Dr.Mohamed Mousa

2. Effects of Sales Mix on CVP :
Sales Mix is the quantity or proportion of various products or services that constitute a company’s total unit sales. It is often the case that the various products or services have different contribution margins.
Up to this point, we’ve assumed a single product; more realistically, we’ll have multiple products with different costs and different margins.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

3. Effects of Sales Mix on CVP :
We can use the same formula in our CVP calculations but must use an average contribution margin for the products.
This technique assumes a constant mix at different levels of total unit sales.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

4. Example no 1:
Magi Industrial Company produces the products( x & y & z )and you have the following data: z y x
Description
40000
100000
60000
Sales revenue 16 20 30
Unit Sale Price
11,2 15 24
Variable Cost / u
20%
50%
30%
Sales mix ratio
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

5. Example no 1:
If you know that the fixed costs of the company is $.
Required :
1. Determine the quantity and value of the B.E.P of each product.
2 - What is the sales number required to achieve a target profit capacity of $?
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

6. Solution
1.Determine the weighted average return on contribution of the unit:
Average Contribution
S.M.R
C.M.R
C.M.U
V.C.U
S.P
Product
0,060
30%
20% 6 24 30 x
0,125
50%
25% 5 15 20 y
4,8
11,2 16 z
0,245
100% -
Total
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

7. Solution 2 - The Value of B.E.P To the company as a whole:
B.E.PR = F. C / Total Average Contribution
= / 0,245 = $
the value of B.E.P per product:
= The value of B.E.P To the company as a whole × sales mix ratio.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

8. Solution B.E.P R To Product x = 80000 x 30% = 24000 $.
B.E.P u To Product x = $ / 30 (s.p) = 800 Unit.
B.E.P R To Product y = x 50% = $.
B.E.P u To Product y = $ / 20 (s.p) = 2000 Unit.
B.E.P R To Product z = x 20% = $.
B.E.P u To Product z = 16000$ / 16(s.p) = 1000Unit.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

9. Solution 3 – The B.E.P R that earn a profit of 49000 $ :
= ( F. C + O.I ) / Total Average Contribution
= ( ) / 0,245 = $
the value of sales that earn a profit per product:
= The B.E.P R that earn a profit To the company as a whole × sales mix ratio.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

10. Solution V.S.P To Product x = 280000 x 30% = 84000 $.
N.S.P To Product x = $ / 30 (s.p) = 2800 Unit.
V.S.P To Product y = x 50% = $.
N.S.P To Product y = $ / 20 (s.p) = 7000 Unit.
V.S.P To Product z = x 20% = 56000$.
N.S.P To Product z = 56000$ / 16(s.p) = 3500Unit.
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

11. Exercises:( Case Study )
ZAAT Industrial Company produces the products( K & L & M )and you have the following data: M L K
Description 90 25 50
Unit Sale Price 72 19 30
Variable Cost / u
10000
4000
6000
Number of units sold
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

12. Exercises :
If you know that the fixed costs of the company is $.
Required :
1. Determine the quantity and value of the B.E.P of each product.
2 - What is the sales number required to achieve a target profit capacity of $?
So far, we’ve been contemplating a business with one product and, therefore, one contribution margin. More usually, a company has multiple products with varying contribution margins. We can still use the tools of CVP analysis but instead of using the contribution margin for the one product, we will use an average contribution margin.
The average CM is calculated based on a defined product mix. In other words, the CM is determined based on a specific relationship of sales of product 1 to total sales, sales of product 2 to total sales, etc. If that relationship of sales changes, so will our average CM.
Dr . Mohamed Mousa

13. CVP for Service and Not-For-Profit Organizations :
CVP isn’t just for merchandising and manufacturing companies.
Service and Not-For-Profit businesses need to focus on measuring their output which is different from the units sold that we’ve been dealing with.
For example, a service agency might measure how many persons they assist or an airline might measure how many passenger miles they fly.
What measure might a hotel use? A restaurant?
CVP, though more prevalent for manufacturing and merchandising companies, is certainly useful for service and not-for-profits as well.
The challenge is to focus on a measure of output which is generally going to be different from the measure of “units sold” that we’ve been dealing with so far.

14. Contribution Margin versus Gross Margin :
Recall from Chapter 2 that Gross Margin = Revenue – Cost of Goods Sold.
In Chapter 3, we learned about Contribution Margin which is Revenue – All Variable Costs.
Gross Margin measures how much a company charges for its products over and above the cost of acquiring or producing them.
Contribution Margin indicates how much of a company’s revenue is available to cover fixed costs.
This is especially significant in the manufacturing sector where businesses carry inventory.
The gross margin is obtained by subtracting all manufacturing costs from revenues. Those manufacturing costs include fixed as well as variable components.
Contribution margin is obtained by subtracting all variable costs, both manufacturing and non-manufacturing, from revenues.
In a period where there is no change in inventory, the operating income will not differ between the two calculations. However, as inventory increases, the fixed manufacturing costs will be absorbed into inventory causing a higher operating income.
Both formats are important for their particular purposes and one shouldn’t be dismissed in favor of the other. Each should be used for the particular purpose.

15. Responsibility accounting “
The Next Lecture
Chapter 6
“ The Master Budget and
Responsibility accounting “
Dr . Mohamed Mousa