Sales Mix

Effect of sales mix on CVP

analysis.
Unit contribution margin is replaced
with contribution margin for a
composite unit.
A composite unit is composed of
specific numbers of each product in
proportion to the product sales mix.
Sales mix is the ratio of the volumes of
the various products.
The resulting break-even formula
for composite unit sales is:
Break-even point
in composite units
Fixed costs
Contribution margin
per composite unit
=
Computing Multiproduct
Break-Even Point

Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution 75 $ 150 $
Sales Mix Ratio 4 1
Computing Multiproduct
Break-Even Point
A company sells windows and doors. They sell
4 windows for every door.
Step 1: Compute contribution margin per
composite unit.
Computing Multiproduct
Break-Even Point
Windows Doors
Selling Price $200 $500
Variable Cost 125 350
Unit Contribution 75 $ 150 $
Sales Mix Ratio 4 1
Composite C/M $300 $150
Break-even point
in composite units
Fixed costs
Contribution margin
per composite unit
=
Step 2: Compute break-even point in
composite units.
Computing Multiproduct
Break-Even Point
Break-even point
in composite units
Fixed costs
Contribution margin
per composite unit
=
Break-even point
in composite units
Rs.900,000
Rs.450 per
composite unit
=
Step 2: Compute break-even point in
composite units.
Computing Multiproduct
Break-Even Point
Break-even point
in composite units
= 2,000 composite units
Sales Composite
Product Mix Units Units
Window 4 2,000 = 8,000
Door 1 2,000 = 2,000

Step 3: Determine the number of windows and
doors that must be sold to break even.
Computing Multiproduct
Break-Even Point

Windows Doors Combined
Selling Price $200 $500
Variable Cost 125.00 350.00
Unit Contribution 75.00 $ 150.00 $
Sales Volume 8,000 2,000
Total Contribution 600,000 $ 300,000 $ 900,000 $
Fixed Costs 900,000
Income $ 0
Step 4: Verify the results.
Multiproduct Break-Even
Income Statement
Case Study
Multi products Company has a sales ratio of 2:3:5 for
models X, Y and Z respectively. Total fixed cost for
the year are Rs 200000.The sale price, variable cost
and contribution margin associated with each product
are as follows:
M-X M-Y M-Z
Sales Price 50 25 10
Variable Cost 30 15 8
Contribution 20 10 2
Find out composited BEP and the no. of individual
product required at B.E.P is then determined.

Case the no. of individual product required at
B.E.P is then determined.
M-X M-Y M-Z
Sales Price 50 25 10
Variable Cost 30 15 8
Contribution 20 10 2
Sales Mix 2 3 5
Total contribution 40 30 10 80

Break-even point
in composite units
Fixed costs
Contribution margin
per composite unit
=
Break-even point
in composite units
Rs200,000
Rs.80 per composite
unit
=
Step 2: Compute break-even point in
composite units.
Computing Multiproduct
Break-Even Point
Break-even point
in composite units
= 2500 composite units
the no. of individual product required at
B.E.P is then determined.
In order to fill 2500 baskets, it will take the following Units for
each model.
Model X =2500 x 2=5000 units
Model Y = 2500 x 3 = 7500 units
Model Z = 2500 x 5 = 12500 units


Limiting of key factor
A limiting or key factor may be defined as the factor
in the activities of an undertaking, which at a
particular point in time or over a period will limit the
volume of output. Examples of limiting factors are:
Sales
Materials
Labour
Production capacity/machine hours
Financial resources
Example:-
Product A B
Contribution per unit Rs.15 Rs.20
Which Product will be more profitable
A or B??

Contribution per unit of key factor
Product A B
Contribution per unit Rs.15 Rs.20
Product B , will be more profitable
Contribution per unit of key factor
Product A B
Contribution per unit Rs.15 Rs.20
Material required per unit 3kg 5kg

Contr. per kg of material Rs.5 Rs.4
Product A, will be more profitable
Limiting Key Factor-Material
Lets take an example that the material
available is only 15000 kg
A B
No. of units that 5000 3000
can be produced
Contribution 65000 60000
Product A, is more profitable



Problem:-
The following particulars are extracted from
the records of a company
A B
Selling Price (per unit) 100 120
Consumption of material p.u 2kg 3Kg
Material Cost Rs. 10 Rs. 15
Direct Wages Rs. 15 Rs.10
Problem:-
A B
Direct Expenses 5 6
Machine hours used p.u 3 2
Overhead expenses p.u:
Fixed Rs. 5 Rs. 10
Variable Rs. 15 Rs. 20
Direct wages per hour is Rs.5
Problem
a) Comment on the profitability of each product (both
use the same raw material) when:
1. Total Sales potential in units is limited
2. Total Sales Potential in value is limited
3. Raw material is in short supply and
4. Production capacity in terms of machine hours) is
the limiting factor.

b) Assuming raw material as the key factor, availability
of which is 10000 kg and maximum sales potential
of each product being 3,500 units, find out the
product mix which will yield the maximum profit
Solution
Statement of Marginal Cost and Contribution
A B
Sales Rs.100 Rs.120
Less:- Marginal Cost
Direct Material 10 15
Direct Wages 15 10
Direct Expenses 5 6
Variable OHD 15 20
45 51
Contribution 55 69
P/V Ratio 55% 57.5%
Contribn per kg of material 27.5 23
Contribn per machine hour 18.3 34.5
Comments
1. B is more profitable as its making a larger
contribution per unit as compared to A
2. B is more profitable as its P/V ratio is more
3. A is more profitable as its contribution per
kg of material is more
4. B is more profitable as it makes larger
contribution per machine hour

Solution
b) When Raw material is key factor.
A is more profitable to produce as its
contribution per kg of material is higher than
B.
For 3500 units of A-material consumed will be
3500 x 2 kg=7000 Kg. The balance 3000 kg
can be used to produce 1000 units(3000kg/3)
of B.
Thus the product mix is 3500 units of A and
1000 units of B