Question

The basic assumptions is that the company has only one product. How can we use CVP analysis for a multi-product company? Another basic assumption is that all costs can be classified as either fixed or variable. How can we adapt CVP analysis for situations that have step fixed or curve-linear variable costs?

Answer 1

Solution:

CVP analysis helps to understand the break-even sales of the company. The same is computed by considering the sales, variable cost and fixed cost. The contribution margin is calculated first by considering the sales and variable cost per unit. Then the contribution margin is divided with the total fixed cost to get the break-even sales in units and in terms of amount. The calculation is simple for the single product company. But for the multi-product company the same is little bit complicated. For the multi-product company first need to identify the selling price and the variable cost per unit of each product and compute the contribution margin on the basis of the same. After that the weighted average method is required to apply to compute the weighted average contribution margin. For the same the number of quantity sale of each product are required. After getting the weighted average contribution margin, the break-even sales are computed by dividing the contribution margin with the total fixed cost. Total fixed cost means the fixed cost incurred for all the products. By this the break-even sales of the company for all the product will be computed. Also by considering the product wise contribution margin and fixed cost, the break-even sales of product wise will be computed.

The fixed cost and the variable cost are considered at the time of computing the break-even sales. Generally, there are three types of cost i.e. fixed cost, variable cost and mixed cost. For the mixed cost first need to segregate the fixed cost and the variable cost element. For the same the formula requires to apply to compute the variable cost per unit is Change In Total Cost/Change In Number Of Units. This will help to compute the total variable cost by multiplying the total number of units sold with the variable cost per unit. Then the same is deducted from the total cost to get the fixed cost. After getting the fixed and variable element, then apply the normal process to compute the break-even sales.

References:

Birca, A. G. (2017). COST-VOLUME-PROFIT ANALYSIS: COST REDUCTION ALTERNATIVES BASED ON THE BREAKEVEN POINT. ???????? ??????????? ????? ? ???????????, (12), 55-58.

Ismail, K., Izah, K. N., & Wan Hussin, W. N. (2015). GEZ petrol station: Using cost-volume-profit analysis for planning.