Accounting Business Reporting for Decision Making

430 Accounting: Business Reporting for Decision Making

(continued)

bSum of the contribution margin for each product multiplied by sales mix

For Candles = $10 × 0.30

For Soaps = $18 × 0.20

For Detergents = $ 5 × 0.50

=

=

=

$3.00

$3.60

$2.50

$9.10

Unit sales required to break even can be calculated as:

Fixed costs

WACM per unit

=

$355 000

$9.10

= 39 011 units (rounded)

We can then apply the sales mix per product to the 39 011 units to determine how many of each

product would need to be sold to break even.

Candles

Soaps

Detergents

39 011 units × 0.30

39 011 units × 0.20

39 011 units × 0.50

11 703

7 802

19 506

39 011

Note that multi-product CVP analysis is of value only when the sales mix is predictable and relatively

constant. Below is a statement of profit or loss showing the contribution to fixed costs by each product

at break-even using each product’s sales requirements for break-even.

Candles Soaps Detergents Total

Sales volume at break-even

Revenue (sales volume × selling price)

Less: Variable costs (sales volume ×

variable cost per unit)

Contribution margin (revenue less

variable costs)

$

$

11 703

292 575

175 545

117 030

$

$

7 802

312 080

171 644

140 436

$

$

19 506

390 120

292 590

97 530 $ 354 996

Less: Fixed costs 355 000

Profit (due to rounding) $ 4

So far, we have not mentioned the treatment of income taxes in relation to the desired profit in CVP

analysis. For CVP analysis we need to use pre-tax profit. Assume Coconut Plantations Pty Ltd planned a

desired after-tax profit of $200 000. How would we be able to determine the pre-tax amount? To calcu-

late a pre-tax profit we divide the after-tax profit by 1 minus the income tax rate. This conversion of

after-tax profit to a pre-tax profit is necessary to perform the CVP calculations. Therefore, if Coconut

Plantations wants an after-tax profit of $200 000 what will be the pre-tax profit? Assuming a tax rate of

30 per cent, then:

Pre-tax profit =

$200 000

(1 − 0.30)

= $285 714

This shows that to earn an after-tax profit of $200 000, Coconut Plantations Pty Ltd would need to

earn a pre-tax profit of $285 714. Once the pre-tax profit target has been determined, the remainder of

the CVP calculations can be conducted as described in earlier sections.