Accounting Business Reporting for Decision Making

CHAPTER 10 Cost–volume–profit analysis 429

Break-even analysis for multiple products

In our previous example, ATC had only one product (or tournament), so how can CVP analysis work

when there is more than one product or service? CVP analysis for a multi-product entity relies on

knowing or assuming the sales mix (i.e. how many units of each product/service are/will be sold relative

to total units sold). CVP analysis for a multi-product entity relies on the sales mix between each of the

products/services remaining consistent for each scenario under consideration. The CVP calculation for a

multi-product entity is shown in illustrative example 10.2.

ILLUSTRATIVE EXAMPLE 10.2

Break-even analysis for multiple products

Let’s return to Coconut Plantations Pty Ltd, a small company that manufactures coconut-based prod-

ucts, including candles, soaps and detergents. Data relating to the ‘bricks and mortar’ sales of their

three products is provided below.

Products

Candles (C) Soaps (S) Detergents (D)

Annual volume in units (200 000 total units)

Selling price per unit

Variable costs per unit

Annual fixed costs are $355 000

60 000

$25

$15

40 000

$40

$22

100 000

$20

$15

The problem is that Coconut Plantations Pty Ltd has not one, but three contribution margins. If our

basic break-even calculation is going to help, then we need to determine some kind of average con-

tribution margin. This is where the sales mix is used to determine a weighted average contribution

margin (WACM). The WACM is the contribution margin after weighting the unit contribution margins by

its relative sales mix. The calculation of the WACM follows.

The sales mix, along with the contribution margin per unit, is used to calculate the weighted average

contribution margin.

Candles (C) Soaps (S) Detergents (D)

Annual volume in units

Selling price per unit

Variable costs per unit

Contribution margin

Sales mixa

Weighted average contribution margin (WACM)b

60 000

$25

$15

$10

0.30

3.0

40 000

$40

$22

$18

0.20

3.60

100 000

$20

$15

$5

0.50

2.50 9.10

aCalculated as Number of sales units of product

Total number of sales units for all products

For Candles =

60 000 units

= 0.30

200 000 units

For Soaps =

40 000 units

= 0.20

200 000 units

For Detergents =

100 000 units

= 0.50

200 000 units