Cost-Volume -Profit Analysis 113focusing on a contribution margin per unit, when we have multiple products
we must base our calculations on the percentage contribution margin for each
dollar of revenue.”
“Sounds complicated.”
“Not really, Abbey. It’s probably easier, though, for me to show you how it
works than to explain it. All I need is your estimate of the sales mix. For every
book you sell individually, how many hats will you sell and how many packages
will you sell? These estimates do not have to be exact—businesspeople typi-
cally talk about ballpark estimates.”
“My friend and I did discuss this. We were not sure, so we came up with a
range. We think that for every 100 books we sell individually, we will sell 50
packages. A surprisingly large number of people are active in this regard. They
actually do enjoy seeking these birds out in the wild. And, of course, everyone
knows you need a wide-brimmed hat in Florida. We guessed that we might also
sell 20 hats individually for every 100 books sold. If things go really well, we
might sell as many as 70 packages and 30 hats for every 100 books. On the pes-
simistic side, we could sell as few as 30 packages and 10 hats for the same 100
books. Is this okay?”
“Actually, that’s even better. If you’re sure of these ranges, then we can
do a sensitivity analysis to see how our profits will change as the mix changes.
We need to know how much our profit will vary with changes in the mix. Are
you comfortable with these ranges?”
“ Yes.”
“To do this analysis we must first build a product mix analysis. Here, I’ll
show you.”
Abbey was very impressed as Stephan built the analysis on his laptop (see
Exhibit 3.9). “Just as we analyzed the unit costs before, we build a similar cost
analysis. The only difference is that this time we build it for a composite unit
defined by the mix. For your expected mix, 100 books plus 50 packages plus 20
hats, we see that for every $16,000 in sales you will have $11,180 in variable
costs. This means that on a percentage basis your variable costs are 69.9%
ofsales as long as you sell in that mix. Note that we now have a percentage def-
inition of contribution margin, not a unit definition—contribution margin
EXHIBIT 3.8 Variable package cost
estimates.
Hat $ 24
Book pr inting 35
10% site referral fee 14
5% Web site commission 7
Peterson Guide 10
Package logistics 10
$100