Study Unit 3.

Multiple Products
 Study outcomes
 On completion of this study unit you should be able
to:
 Compute the break-even point in units and rand in
organisations selling more than one type of
product.
 Compute the turnover in units and rand to reach a
target net income in organisations selling more
than one type of product.
 Compute the net income in organisations with
more than one type of product when a change in
sales mix occur.
 Determine a sales and production mix to maximise
the profit in an organisation.
 Study outcomes
 Oncompletion of this study unit you
should be able to:
 Determine a sales and production mix to
maximise the profit in an organisation
when a restricting factor occurs.
 Determine the most profitable product in an
organisation.
 Distinguish between cases where a sales
mix in units is applicable and where a sales
mix in rand is applicable.
 3.1.1 Introduction
 In study unit 2 cost-volume-profit
relationships with the emphasis on a
single were discussed.
 In this study unit the emphasis shifts to
multiple products in organisations.
 A limiting factor will have an impact on
the production mix.
 3.1.2 Sales mix
 Sales mix refers to the relationship in which a
company’s products are sold.
 Only applicable at companies with more than
one product.
 Certain products are more profitable than
others and thus the profitable products should
be maximised.
 Please note – Assumptions are still
applicable.
 3.1.3 Break-even point and
multiple products
 Break-even point = Fixed costs / Contribution
 What is the contribution for multiple products?
 Use average contribution:
 Average contribution per unit = total contribution of
the sales mix divided by the number of units of the
sales mix.
 Average contribution margin = average
contribution per unit divided by the average selling
price of the sales mix.
 3.1.3 Break-even point and
multiple products
 Sales mix does not stay constant and
therefor a formula should be applied to
accomodate this aspect.
 Break-even = Fixed cost
(units) Ave contribution per unit

 Break-even = Fixed cost

(rand) Ave contribution margin
3.1.4 Target profit and multiple
products
 The same formula as at study unit 2
 Target sales = Fixed costs + profit
(units) Ave contribution per unit

 Target sales = Fixed costs + profit

(rand) Ave contribution margin
 Example – mix in units
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Monthly fixed costs are R108 000

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
Contribution
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
Contribution

R 108,000
=
R 10.80
How many units of
= 10,000 units each product?
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total contribution R 24 R 24 R 60 R 108

Average contribution R 10.80

Fixed cost
Break even =
Contribution

R 108,000
=
R 10.80

= 10,000 units

4 2 4
=
10 10 10
 Example - Rand
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

Average contribution R 10.80

Average contribution % 57.4%

 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

Average contribution R 10.80

How much rand for
Average contribution % each product 57.4%

Fixed cost R 108,000

Break even = = = R 188,000
Contribution % 57.4%
 Example
P Q R TOTAL
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Units 4 2 4 10

Total sales R 48 R 40 R 100 R 188

Average selling price R 18.80

Average contribution R 10.80

Average contribution % 57.4%

Fixed cost R 108,000

Break even = = = R 188,000
Contribution % 57.4%
48 40 100
=
188 188 188
 Example – mix in %
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

Sales mix 25 20 12 57
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

Sales mix 25 20 12 57

Contribution R 150 R 240 R 180 R 570

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

Sales mix 25 20 12 57

Contribution R 150 R 240 R 180 R 570

Average contribution R 10
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
Contribution
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
Contribution

R 114,000
=
R 10

= 11,400 units How many units of

each product?
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Fixed cost
Break even =
Contribution

R 114,000
=
R 10

= 11,400 units

25 20 12
=
57 57 57

= 5,000 4,000 2,400

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales mix 30% 40% 30%

Sales in Rand R 30 R 40 R 30

Number of units 2.5 2 1.2

Sales mix 25 20 12 57

Contribution R 150 R 240 R 180 R 570

Average contribution R 10
 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales R 300 R 400 R 300 R 1,000

Sales mix 25 20 12 57

Average selling price R 300 R 400 R 300 R 17.54

Average contribution R 10.00

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales R 300 R 400 R 300 R 1,000

Sales mix 25 20 12 57

Average selling price R 300 R 400 R 300 R 17.54

Average contribution R 10.00

Average contribution % 57%

 Example
P Q R
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales R 300 R 400 R 300 R 1,000

Sales mix 25 20 12 57

Average selling price R 300 R 400 R 300 R 17.54

Average contribution R 10.00

How much Rand
Average contribution % for each product? 57%

Fixed cost R 114,000

Break even = = R 200,000
Contribution % 57%
 Example
Selling price R 12 R 20 R 25
Variable cost R 6 R 8 R 10
Contribution R 6 R 12 R 15

Sales R 300 R 400 R 300 R 1,000

Sales mix 25 20 12 57

Average selling price R 300 R 400 R 300 R 17.54

Average contribution R 10.00

Average contribution % 57%

Fixed cost R 114,000

Break even = = R 200,000
Contribution % 57%
300 400 300
=
1,000 1,000 1,000
 3.1.5 Contribution and
restricting factors
 Restricting factors are those factors that
limit an organisation or prevents it to
make unrestricted profit.
 Examples??
 The contribution per restricting factor
should be maximised.
 We are only looking at one restricting
factor now – in study unit 6 we’ll look at
more than one
3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?
3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?

Units produced 100.0 75.0 60.0

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?

Units produced 100.0 75.0 60.0

Contribution rendered R 900.00

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?

Units produced 100.0 75.0 60.0

Contribution rendered R 750.00

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?

Units produced 100.0 75.0 60.0

Contribution rendered R 780.00

3.1.5 Profitability of products
P Q R
Selling price R 30 R 40 R 50
Variable cost R 21 R 30 R 37
Direct materials R 12 R 18 R 22
Direct labour (R10/hour) R 6 R 8 R 10
Overheads R 3 R 4 R 5

Contribution per unit R 9 R 10 R 13

DLH per unit 0.6 0.8 1.0

Contribution per DLH R 15.00 R 12.50 R 13.00

If there is an additional 60 DLH avaliable to the company.

What would be the best division of it?

Units produced 100.0 75.0 60.0

Contribution rendered R 900.00 R 750.00 R 780.00

 3.1.5 Sales mix decision
 What is the most profitable sales mix?
 If only one restricting factor, most of the
product with the highest contribution per
restricting factor
 More than one restricting factor, use
linear programming (study unit 6)
 3.1.6 Summary
 For sales of more than one product the same
principles will be applicable as for one
product:
 Break-even point calculation
 Target sales calculation
 Use only average contribution per unit and
average contribution margin percentage
 If sales mix changes, the break-even point
and target sales will also change
 Restricting factor – maximise the contribution
per restricting factor
 Homework
 Horngren:
 3-27 ; 3-45