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So far, we have focused on a single product case. We now consider the case in
which the firm produces and sells two products. Our discussion can be easily
extended to the case in which the number of the products is more than two.
Let a company produce and sell two products, 1 and 2. We can compute the
weighted average unit contribution margin as follows.
q1 q2
WAUCM = UCM1 x q1 + q2 + UCM2 x q + q
1 2
S1 S2
WACMR = CMR1 x + CMR 2 x
S1 + S 2 S1 + S 2
FC
BE Quantity = QB = WAUCM
FC
BE Sales = SB = WACMR .
It is important that the BE quantity and sales in the above formulas denote the total
number of units and sales dollars of product 1 and product 2, assuming the same
sales mix. Thus, to know the component of each product, we need to consider the
relative proportion. That is,
q1 q2
q1B = QB x q + q and q2B = QB x q + q .
1 2 1 2
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In-Class Problem for CVP Analysis
Frutex. Inc has two products, Fantasy and Joy. Current cost and sales data on two
products are:
Fantasy Joy
Unit Price $15 $100
Variable expense/unit 9 20
Annual sales quantity 20,000 5,000
Another product, Samoan Delight, has just come onto the market. Assume that the
company can sell 10,000 units at $45 each. The variable expenses would be $36
each, and the there is no change in the fixed expenses.
2a. Prepare a contribution I/S showing both dollar and percent columns for each
product and for the company as a whole.
2b. Compute the BEP in sales for the company.
The president of the company says, “There is something strange here! Our fixed
costs haven’t changed, and the company has greater contribution margin if the new
product is added. But your analysis shows that the break-even point in sales goes
up. With a greater contribution margin, BEP should go down, not up. I don’t
understand.
2
Answer:
1b. UCMF = 15 - 9 = 6
UMCJ = 100 - 20 = 80
2c. The president’s statement is incorrect since the BEP does not go down when CM increases.
Recall that BEP in sales is computed by FC / WACMR, and WACMR has been decreased from 65% to
48.8%. The reason is that Delight has a lower CMR, 20%, compared to Joy and Fantasy, which causes the
average profitability of company to decrease per dollar of sales.
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Multiple Products & Sales Mix (Alternative Method)
Example:
Essie owns a dress shop. She can purchase dresses for $32 from
a local factory; other variable costs amount to $10 per dress.
Assume that the selling price per dress is $70 and total fixed
costs amount to $84,000.
Packaged in a box
1 dress | 2 blouses
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What is the new breakeven point (in terms of dresses and
blouses)?
How many units of dresses and blouses can achieve the target
profit of $16,000?
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Case 6-32 (75 minutes)
Before proceeding with the solution, it is helpful first to restructure the data into
contribution format for each of the three alternatives. (The data in the statements below
are in thousands.)
15% 20%
Commission Commission Own Sales Force
$16,000.
Sales $16,000 100% $16,000 100% 0 100.0%
Variable expenses:
Manufacturing 7,200 7,200 7,200.0
Commissions (15%, 20% 1,200.
7.5%) 2,400 3,200 0
8,400.
Total variable expenses 9,600 60 10,400 65 0 52.5
7,600.
Contribution margin 6,400 40% 5,600 35% 0 47.5%
Fixed expenses:
Manufacturing overhead 2,340 2,340 2,340.0
Marketing 120 120 2,520.0 *
Administrative 1,800 1,800 1,725.0 **
1. When the income before taxes is zero, income taxes will also
be zero and net income will be zero. Therefore, the break-even
calculations can be based on the income before taxes.
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Case 6-32 (continued)
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