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Lecture 3

COMMERCE 2AB3 Lecture Notes - Lecture 3: Fixed Cost


Department
Commerce
Course Code
COMMERCE 2AB3
Professor
Mohamed Shehata
Lecture
3

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CVP-Lecture Notes Dr. Mohamed Shehata
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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