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Mohamed Shehata (10)

Lecture 3

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Chapter 3

Cost-Volume-Profit (CVP) Analysis

Part II – Multiple Product Case

If a company sells more than one product with different selling prices, contribution margins and

fixed costs, it becomes more difficult to determine required sales needed to achieve a target

profit. To overcome this difficulty, we assume that the sales mix is constant.

Sales Mix:

The term sales mix means the relative proportions in which a company’s products are sold.

CVP analysis with multiple products assumes that sales will continue at the same mix of

products, expressed in either sales units or sales dollars. In essence, the assumption is made

that the firm has only one product that consists of a basket (package or bundle) of its various

products in a specified proportion.

Thus, we can calculate the sales to achieve a certain level of target profit in one of three

different equations as follows:

1. Number of packages (bundle) that the company should sell to achieve an overall target profit.

2. Number of units of each product that the company should sell to achieve a target profit.

3. Total sales revenues ($) that the company should generate from all products to achieve an

overall target profit.

1. # of packages that the company should produce and sell to achieve an overall target

profit.

Total Packages needed to achieve target profits =

/packageCM

profitsTarget + Costs Fixed

(3)

2. Total # of all units that the company should sell to achieve an overall target profit.

Total Units from all products to achieve target profits =

/unitWACM

profitsTarget + Costs Fixed

(4)

Where:

WACM/unit = Weighted Average contribution margin per unit

WACM/unit = (CM per unit of the First product x weight of the first product in the package)

+ (CM per unit of Second product x weight of the Second product) + ….

Or

WACM/unit = Total CM per package/ total # of units in the package from all products

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