Monday, June 11, 2012

CVP Analysis Multiple Products

How to conduct a CVP Analysis with Multiple Products in Same Company

Multiple products require weighting a sale mix: A majority of companies sell more than one product and they will require a CVP equation in order to properly use the CVP analysis formula.

When conducting a CVP analysis, the sales mix is the number of units sold of a given product relative to the total units sold by the entire company. The same basic equations are used when there are multiple products with one important exception.  This exception is that the contribution margin must be weighted by the sales mix.

Accounting Multiple Product CVP Example: 

Company sells 16,000 units of product A
Company sells 4,000 units of product B
The sales mix is 80% A and 20% B.

A weighted-average unit contribution margin is calculated by:

Product’s contribution margin (CM) multiplied by sales mix percentage, and then summing the results together for individual products.  The result is then divided into fixed expenses to arrive at the break-even point in units.

Final Step toward Multiple Product CVP Analysis:  The sale-mix percentage is multiplied by the number of "units" to calculate the individual product sales to break even point. A change in a firm’s sales mix, no matter how big or small, will alter the company’s break-even point.


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