11th Edition

Chapter 6

McGraw­Hill/Irwin

Copyright © 2006, The McGraw­Hill Companies, Inc.

Cost-Volume-Profit
Relationships
Chapter Six

McGraw­Hill/Irwin

Copyright © 2006, The McGraw­Hill Companies, Inc.

Basics of Cost-Volume-Profit Analysis

Contribution
Contribution Margin
Margin (CM)
(CM) is
is the
the amount
amount
remaining
remaining from
from sales
sales revenue
revenue after
after variable
variable
expenses
expenses have
have been
been deducted.
deducted.
McGraw­Hill/Irwin

Copyright © 2006, The McGraw­Hill Companies, Inc.

. The McGraw­Hill Companies. McGraw­Hill/Irwin Copyright © 2006. Any remaining CM contributes to net operating income. Inc.Basics of Cost-Volume-Profit Analysis CM is used first to cover fixed expenses.

If Racing sells an additional bicycle. The McGraw­Hill Companies. variable expenses. and contribution margin can also be expressed on a per unit basis. . McGraw­Hill/Irwin Copyright © 2006. Inc.The Contribution Approach Sales. $200 additional CM will be generated to cover fixed expenses and profit.

 The McGraw­Hill Companies.000 in total CM to break even. Inc. .The Contribution Approach Each month Racing must generate at least $80. McGraw­Hill/Irwin Copyright © 2006.

. it will be operating at the break-even point. McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies. Inc.The Contribution Approach If Racing sells 400 units in a month.

 Inc. The McGraw­Hill Companies. McGraw­Hill/Irwin Copyright © 2006. bikes net operating income will increase by $200.The Contribution Approach If Racing sells one more bike (401 bikes). .

000. . McGraw­Hill/Irwin Copyright © 2006. its net income will be $6.The Contribution Approach We do not need to prepare an income statement to estimate profits at a particular sales volume. Simply multiply the number of units sold above break-even by the contribution margin per unit. Inc. The McGraw­Hill Companies. If Racing sells 430 bikes.

000 Net $$ (20.CVP Relationships in Graphic Form The relationship among revenue.000 Contribution $$ 60. .000 250.000 80.000 Less: 90. The McGraw­Hill Companies.000 Less: fixed fixed expenses expenses 80. and 500 units sold.000 Sales 150.000) McGraw­Hill/Irwin Income Income 400 400 units units $$ 200.000 $$100. profit and volume can be expressed graphically by preparing a CVP graph. cost.000 100.000 80.000 20.000 Less: variable variable expenses expenses 90.000 Less: 80.000 Contribution margin margin 60.000 $$ 80.000) Net operating operating income income (20.000 Copyright © 2006.000 150.000 120.000 $$ -- Income Income 500 500 units units $$250. Income Income 300 300 units units Sales $$ 150. We will use this information to prepare the CVP graph.000 200.000 80.000 80. Racing developed contribution margin income statements at 300.000 120.000 150. 400. Inc.000 $$ 20.000 80.

. The McGraw­Hill Companies. Units McGraw­Hill/Irwin Copyright © 2006. Inc. unit volume is usually represented on the horizontal (X) axis and dollars on the vertical (Y) axis.Dollars CVP Graph In a CVP graph.

 The McGraw­Hill Companies. Inc. .Dollars CVP Graph Fixed Expenses Units McGraw­Hill/Irwin Copyright © 2006.

. The McGraw­Hill Companies.Dollars CVP Graph Total Expenses Fixed Expenses Units McGraw­Hill/Irwin Copyright © 2006. Inc.

 The McGraw­Hill Companies.CVP Graph Dollars Total Sales Total Expenses Fixed Expenses Units McGraw­Hill/Irwin Copyright © 2006. Inc. .

 The McGraw­Hill Companies.000 in sales) Dollars P Los a e r A t i f ro a e r sA Units McGraw­Hill/Irwin Copyright © 2006. Inc. .CVP Graph Break-even point (400 units or $200.

 Inc.000 Each $1.00 increase in sales results in a total contribution margin increase of 40¢. McGraw­Hill/Irwin Copyright © 2006. . The McGraw­Hill Companies.Contribution Margin Ratio The contribution margin ratio is: Total CM CM Ratio = Total sales For Racing Bicycle Company the ratio is: $80.000 = 40% $200.

 Inc.Contribution Margin Ratio Or. The McGraw­Hill Companies. the contribution margin ratio is: Unit CM CM Ratio = Unit selling price For Racing Bicycle Company the ratio is: $200 = 40% $500 McGraw­Hill/Irwin Copyright © 2006. . in terms of units.

Contribution Margin Ratio 400 400 Bikes Bikes Sales $$200.000 Less: 80. ($50.000 $$ 20.000 120. The McGraw­Hill Companies.000 100.000 × 40% = $20.000 20.000 Less: Less: variable variable expenses expenses 120.000 100.000 Net $$ -Net operating operating income income 500 500 Bikes Bikes $$250.000) McGraw­Hill/Irwin Copyright © 2006.000 increase in CM.000 150.000 150. Inc.000 increase in sales revenue results in a $20.000 250.000 80.000 Contribution margin margin 80.000 80.000 A $50.000 Less: fixed fixed expenses expenses 80.000 Sales 200. .000 Contribution 80.

2. 0.758 c. The McGraw­Hill Companies.319 b. 4.49 and the average variable expense per cup is $0. The average fixed expense per month is $1. Inc. 1.100 cups are sold each month on average. .36.242 d.300. 0.Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.139 McGraw­Hill/Irwin Copyright © 2006. What is the CM Ratio for Coffee Klatch? a.

2. 0. Inc.49-$0.758 ($1. The average selling price of a cup of coffee is $1.300. 4.49 and the average variable expense per cup is $0.758 Copyright © 2006.319 Unit selling price b.Quick Check  Coffee Klatch is an espresso stand in a downtown office building.13 = McGraw­Hill/Irwin $1.100 cups are sold each month on average.139 $1. 1.36) = $1. 0.49 = 0.49 c. What is the CM Ratio for Coffee Klatch? Unit contribution margin CM Ratio = a.36. The average fixed expense per month is $1.242 d. . The McGraw­Hill Companies.

 The McGraw­Hill Companies. . Inc.Changes in Fixed Costs and Sales Volume What is the profit impact if Racing can increase unit sales from 500 to 540 by increasing the monthly advertising budget by $10.000? McGraw­Hill/Irwin Copyright © 2006.

but but net net operating operating income income decreased decreased by by $2.Changes in Fixed Costs and Sales Volume $80.000advertising advertising ==$90.000 $10.000.000 $80.000.000 Sales Sales increased increased by by $20. . McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies.000++ $10.000. $20.. Inc.000 $90.000 $2.

 Inc.Changes in Fixed Costs and Sales Volume The Shortcut Solution McGraw­Hill/Irwin Copyright © 2006. . The McGraw­Hill Companies.

 Inc. . to generate an increase in unit sales from 500 to 580? McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies.Change in Variable Costs and Sales Volume What is the profit impact if Racing can use higher quality raw materials. thus increasing variable costs per unit by $10.

Change in Variable Costs and Sales Volume 580 580units units ××$310 $310variable variablecost/unit cost/unit ==$179. .200 $10. increases by by $10.000.000. and and net net operating operating income income increases .. The McGraw­Hill Companies.200 McGraw­Hill/Irwin Copyright © 2006.800 Sales Sales increase increase by by $40. Inc.800 $179. $40.

Change in Fixed Cost.000 per month. (2) increases its advertising budget by $15. . Sales Price and Volume What is the profit impact if Racing (1) cuts its selling price $20 per unit. Inc. The McGraw­Hill Companies. and (3) increases unit sales from 500 to 650 units per month? McGraw­Hill/Irwin Copyright © 2006.

and and net net operating operating income income increases increases by by $2. Sales Price and Volume Sales Sales increase increase by by $62. The McGraw­Hill Companies.Change in Fixed Cost.000. fixed fixed costs costs increase increase by by $15. $62.000.000..000. McGraw­Hill/Irwin Copyright © 2006.000. Inc. $15. .000 $2.

.Change in Variable Cost. and (2) increases unit sales from 500 to 575 bikes? McGraw­Hill/Irwin Copyright © 2006. Inc.000 per month. The McGraw­Hill Companies. Fixed Cost and Sales Volume What is the profit impact if Racing (1) pays a $15 sales commission per bike sold instead of paying salespersons flat salaries that currently total $6.

000 $6. $37. McGraw­Hill/Irwin Copyright © 2006. $31.125. but but fixed fixed expenses expenses decrease decrease by by $6.500.500..Change in Variable Cost. Inc.000.125. Fixed Cost and Sales Volume Sales Sales increase increase by by $37. variable variable costs costs increase increase by by $31. . The McGraw­Hill Companies.

 Inc.Change in Regular Sales Price If Racing has an opportunity to sell 150 bikes to a wholesaler without disturbing sales to other customers or fixed expenses. The McGraw­Hill Companies. . what price would it quote to the wholesaler if it wants to increase monthly profits by $3.000? McGraw­Hill/Irwin Copyright © 2006.

 Inc. The McGraw­Hill Companies.Change in Regular Sales Price McGraw­Hill/Irwin Copyright © 2006. .

Equation method 2. The McGraw­Hill Companies.Break-Even Analysis Break-even analysis can be approached in two ways: 1. Contribution margin method McGraw­Hill/Irwin Copyright © 2006. Inc. .

Equation Method Profits = (Sales – Variable expenses) – Fixed expenses OR Sales = Variable expenses + Fixed expenses + Profits At the break-even point profits equal zero McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies. . Inc.

Break-Even Analysis
Here is the information from Racing Bicycle Company:
Total
Total
Sales
$$250,000
Sales(500
(500bikes)
bikes)
250,000
Less:
Less:variable
variable expenses
expenses 150,000
150,000
Contribution
$$100,000
Contributionmargin
margin
100,000
Less:
80,000
Less:fixed
fixedexpenses
expenses
80,000
Net
$$ 20,000
Netoperating
operatingincome
income
20,000

McGraw­Hill/Irwin

Per
PerUnit
Unit
$$ 500
500
300
300
$$ 200
200

Percent
Percent
100%
100%
60%
60%
40%
40%

Copyright © 2006, The McGraw­Hill Companies, Inc.

Equation Method

We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits

$500Q = $300Q + $80,000 + $0
Where:
Q = Number of bikes sold
$500 = Unit selling price
$300 = Unit variable expense
$80,000 = Total fixed expense

McGraw­Hill/Irwin

Copyright © 2006, The McGraw­Hill Companies, Inc.

Equation Method

We calculate the break-even point as follows:
Sales = Variable expenses + Fixed expenses + Profits

$500Q = $300Q + $80,000 + $0
$200Q = $80,000
Q = $80,000 ÷ $200 per bike
Q = 400 bikes

McGraw­Hill/Irwin

Copyright © 2006, The McGraw­Hill Companies, Inc.

 Inc.000 = Total fixed expenses McGraw­Hill/Irwin Copyright © 2006.000 + $0 Where: X = Total sales dollars 0. .60 = Variable expenses as a % of sales $80. Sales = Variable expenses + Fixed expenses + Profits X = 0.Equation Method  The equation can be modified to calculate the break-even point in sales dollars.60X + $80. The McGraw­Hill Companies.

000 X = $80. The McGraw­Hill Companies.000 McGraw­Hill/Irwin Copyright © 2006.60X + $80. Inc.Equation Method The equation can be modified to calculate the break-even point in sales dollars.40 X = $200.000 + $0 0. .  Sales = Variable expenses + Fixed expenses + Profits X = 0.40X = $80.000 ÷ 0.

 Inc. Break-even point = in units sold Break-even point in total sales dollars = McGraw­Hill/Irwin Fixed expenses Unit contribution margin Fixed expenses CM ratio Copyright © 2006. . The McGraw­Hill Companies.Contribution Margin Method The contribution margin method has two key equations.

Break-even point in total sales dollars = Fixed expenses CM ratio $80.Contribution Margin Method Let’s use the contribution margin method to calculate the break-even point in total sales dollars at Racing. The McGraw­Hill Companies. Inc.000 break-even sales 40% McGraw­Hill/Irwin Copyright © 2006.000 = $200. .

Quick Check  Coffee Klatch is an espresso stand in a downtown office building. 1. .36. Inc. 2.100 cups are sold each month on average.49 and the average variable expense per cup is $0. 1.150 cups McGraw­Hill/Irwin Copyright © 2006. The average selling price of a cup of coffee is $1.200 cups d. The average fixed expense per month is $1. The McGraw­Hill Companies. What is the break-even sales in units? a. 3. 872 cups b.300.611 cups c.

150 cups McGraw­Hill/Irwin Copyright © 2006. 1. 3.49 and theFixed average variable expenses Unit CM expense per cup isBreak-even $0.Quick Check  Coffee Klatch is an espresso stand in a downtown office building.300 = a.300. 1.300 = What is the break-even each month on average. $1.13/cup b.36/cup sales in units? $1.49/cup .611 cups = 1. The McGraw­Hill Companies.100 cups are sold $1. The average selling price of a cup of coffee is $1.200 cups d. 872 cups $1. 2. . Inc. The= average fixed expense per month is $1.$0.36.150 cups c.

36. $3.Quick Check  Coffee Klatch is an espresso stand in a downtown office building.300. $1. The average fixed expense per month is $1.100 cups are sold each month on average. $1.715 c.49 and the average variable expense per cup is $0.788 d. 2.129 McGraw­Hill/Irwin Copyright © 2006. $1. The McGraw­Hill Companies.300 b. . What is the break-even sales in dollars? a. Inc. The average selling price of a cup of coffee is $1.

Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The McGraw­Hill Companies. What is the break-even sales in dollars? a.36. 2. .49 and the average variable expense per cup is $0.758 d.715 $1.300 c. $1. $3. The average fixed expense per month is $1. Inc.788 = 0. $1. $1.300.100 cups are sold each month on average.129 = $1. The average selling price of a cup of coffee is $1.715 McGraw­Hill/Irwin Copyright © 2006.300 Fixed expenses Break-even = CM Ratio sales b.

McGraw­Hill/Irwin Copyright © 2006. Suppose Racing Bicycle Company wants to know how many bikes must be sold to earn a profit of $100. The McGraw­Hill Companies. Inc. .000.Target Profit Analysis The equation and contribution margin methods can be used to determine the sales volume needed to achieve a target profit.

 Inc. .000 $200Q = $180.000 + $100.The CVP Equation Method Sales = Variable expenses + Fixed expenses + Profits $500Q = $300Q + $80. The McGraw­Hill Companies.000 Q = 900 bikes McGraw­Hill/Irwin Copyright © 2006.

Unit sales to attain = the target profit Fixed expenses + Target profit Unit contribution margin $80. Inc. .000 + $100.The Contribution Margin Approach The contribution margin method can be used to determine that 900 bikes must be sold to earn the target profit of $100.000.000 = 900 bikes $200/bike McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies.

500 per month? a.Quick Check  Coffee Klatch is an espresso stand in a downtown office building. Inc. How many cups of coffee would have to be sold to attain target profits of $2.212 cups c.49 and the average variable expense per cup is $0. 1.36.363 cups b.150 cups d. 2. . 3. The average fixed expense per month is $1. The McGraw­Hill Companies.200 cups McGraw­Hill/Irwin Copyright © 2006. 4. The average selling price of a cup of coffee is $1.300.

800 How many cups of expense per month is= $1. The average $1. The McGraw­Hill Companies.212 cups c.36 expense per cup is $0. $1.500 selling price = of a cup of coffee is $1. 4.300 + $2.200 cups McGraw­Hill/Irwin Copyright © 2006. .300.49 $0.36.49 and -the average variable $1. Inc. 3. The average fixed $3.500 per month?= 3.150 cups d.13 coffee would have to be sold to attain target profits of $2. 1.363 cups b. 2.Quick Check  Unit sales Fixed expenses + Target profit to attain = Unit CM Coffee Klatch is an espresso stand in a target profit downtown office building.363 cups a.

 The McGraw­Hill Companies.Break-even sales Let’s look at Racing Bicycle Company and determine the margin of safety.The Margin of Safety The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. Margin of safety = Total sales . . Inc. McGraw­Hill/Irwin Copyright © 2006.

 Inc.000 Contribution margin margin 80.000 100. the margin of safety is $50.000 Sales 200.000 100.000 Less: 80.000 150.000 80.000.000 20.000 Less: variable variable expenses expenses 120.000 $$ 20.000 Contribution 80. .000 as shown Break-even Break-even sales sales 400 400 units units Sales $$ 200. given that we have already determined the break-even sales to be $200.000 80.000 Net $$ -Net operating operating income income McGraw­Hill/Irwin Actual Actual sales sales 500 500 units units $$ 250.000.000 Copyright © 2006.000 Less: fixed fixed expenses expenses 80.000 250.000 150.000 Less: 120. The McGraw­Hill Companies.The Margin of Safety If we assume that Racing Bicycle Company has actual sales of $250.

000 Less: variable variable expenses expenses 120.000 250.000 Less: fixed fixed expenses expenses 80. Inc.000 Contribution margin margin 80.000 ÷ $250.000 Sales 200.000 80.000 Less: 80.000 Contribution 80.000) Break-even Break-even sales sales 400 400 units units Sales $$ 200.The Margin of Safety The margin of safety can be expressed as 20% of sales. .000 150.000 80.000 100.000 Copyright © 2006.000 100.000 150.000 Less: 120. ($50.000 $$ 20. The McGraw­Hill Companies.000 20.000 Net $$ -Net operating operating income income McGraw­Hill/Irwin Actual Actual sales sales 500 500 units units $$ 250.

 The McGraw­Hill Companies. .The Margin of Safety The margin of safety can be expressed in terms of the number of units sold. and each bike sells for $500. Inc. Margin of $50.000 = = 100 bikes Safety in units $500 McGraw­Hill/Irwin Copyright © 2006.000. The margin of safety at Racing is $50.

What is the margin of safety? a.100 cups McGraw­Hill/Irwin Copyright © 2006. 2.250 cups b.36. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0. Inc. 2. 3. The McGraw­Hill Companies.100 cups are sold each month on average.300.150 cups d. 950 cups c.Quick Check  Coffee Klatch is an espresso stand in a downtown office building. 1. . The average fixed expense per month is $1.

150 cups d.100 cups = 45% safety? percentage a.250 cups b.49 and the –average variable = 2.100 cups are sold or each month on of average. The McGraw­Hill Companies. 950 cups c. the margin of 950iscups Margin safety What = 2. = 950The cupsaverage fixed expense per month is $1.100 cups McGraw­Hill/Irwin Copyright © 2006.100 cups 1.300.36. .Quick Check  Coffee Klatch is an espresso stand in a downtown building. 1. Thesales average selling price Marginoffice of safety = Total – Break-even sales of a cup of coffee is $1. 2.150 cups expense per cup is $0. Inc. 3. 2.

 Inc. The McGraw­Hill Companies.Cost Structure and Profit Stability Cost structure refers to the relative proportion of fixed and variable costs in an organization. McGraw­Hill/Irwin Copyright © 2006. Managers often have some latitude in determining their organization’s cost structure. .

will be lower in bad years compared to companies with lower proportion of fixed costs. McGraw­Hill/Irwin Copyright © 2006. Inc.Cost Structure and Profit Stability There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures. . The McGraw­Hill Companies. An advantage of a high fixed cost structure is that income will be higher in good years compared to companies A disadvantage of a high fixed with lower proportion of cost structure is that income fixed costs.

Operating Leverage • A measure of how sensitive net operating income is to percentage changes in sales. Degree of Contribution margin = operating leverage Net operating income McGraw­Hill/Irwin Copyright © 2006. Inc. . The McGraw­Hill Companies.

 Inc.000 20.000 80.000 150.000 = 5 $20.000 McGraw­Hill/Irwin Copyright © 2006. the degree of operating leverage is 5.000 100.Operating Leverage At Racing.000 80. The McGraw­Hill Companies. Actual Actual sales sales Sales Sales Less: Less: variable variable expenses expenses Contribution Contribution margin margin Less: Less: fixed fixed expenses expenses Net Net income income 500 500 Bikes Bikes $$ 250.000 250.000 100. .000 150.000 $100.000 $$ 20.

if Racing increases its sales by 10%. Percent increase in sales Degree of operating leverage Percent increase in profits × 10% 5 50% Here’s the verification! McGraw­Hill/Irwin Copyright © 2006. . The McGraw­Hill Companies.Operating Leverage With an operating leverage of 5. Inc. net operating income would increase by 50%.

000 to $275.000. . .Operating Leverage 10% increase in sales from $250. . The McGraw­Hill Companies.000 .000 to $30. McGraw­Hill/Irwin Copyright © 2006. Inc. . . results in a 50% increase in income from $20. .

. 2. 2. 0.45 c. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.Quick Check  Coffee Klatch is an espresso stand in a downtown office building. The McGraw­Hill Companies.36.92 McGraw­Hill/Irwin Copyright © 2006.300. What is the operating leverage? a. Inc. 0.21 b.100 cups are sold each month on average. 2.34 d. The average fixed expense per month is $1.

21 Operating Contribution margin leverage = Net operating income b. 2.21 d. The average fixed expense per month is $1.100 cups are sold each month on average. 2.45 $2. What is the operating leverage? a.49 and the average variable expense per cup is $0.Quick Check  Coffee Klatch is an espresso stand in a downtown office building.300.92 McGraw­Hill/Irwin Copyright © 2006.34 = $1. The McGraw­Hill Companies.373 c. The average selling price of a cup of coffee is $1. 0. Inc. 0.073 = 2. . 2.36.

and the average fixed expense per month is $1. . 30. The McGraw­Hill Companies. 20. 44. Inc.1% d. by how much should net operating income increase? a.300.2% McGraw­Hill/Irwin Copyright © 2006. 2.0% b.36.100 cups are sold each month on average. If sales increase by 20%. 22. the average variable expense per cup is $0.Quick Check  At Coffee Klatch the average selling price of a cup of coffee is $1.0% c.49.

Quick Check  At Coffee Klatch the average selling price of a cup of coffee is $1.49.2% McGraw­Hill/Irwin Copyright © 2006. .300. 20. Inc. 44.0% b.36.100 cups are sold each month on average. 2. 30. The McGraw­Hill Companies. the average variable expense per cup is $0.0% c. and the average fixed expense per month is $1. by how much should net operating income increase? a.1% d. If sales increase by 20%. 22.

100 cups Sales $ 3.Verify Increase in Profit Actual sales 2.0% 44. Inc.755 907 2. The McGraw­Hill Companies.129 Less: Variable expenses 756 Contribution margin 2.548 20. .300 $ 1.300 Net operating income $ 1.073 % change in sales % change in net operating income McGraw­Hill/Irwin Increased sales 2.520 cups $ 3.2% Copyright © 2006.848 1.373 Less: Fixed expenses 1.

 Inc. Commissions based on sales dollars can lead to lower profits in a company. . Let’s look at an example.Structuring Sales Commissions Companies generally compensate salespeople by paying them either a commission based on sales or a salary plus a sales commission. The McGraw­Hill Companies. McGraw­Hill/Irwin Copyright © 2006.

the XR7 and the Turbo. The McGraw­Hill Companies. . The Turbo sells for $150 and earns a contribution margin per unit of $18. McGraw­Hill/Irwin Copyright © 2006.Structuring Sales Commissions Pipeline Unlimited produces two types of surfboards. The sales force at Pipeline Unlimited is compensated based on sales commissions. Inc. The XR7 sells for $100 and generates a contribution margin per unit of $25.

you would push hard to sell the Turbo even though the XR7 earns a higher contribution margin per unit. McGraw­Hill/Irwin Copyright © 2006. Inc. The McGraw­Hill Companies.Structuring Sales Commissions If you were on the sales force at Pipeline. commissions can be based on contribution margin rather than on selling price alone. To eliminate this type of conflict. .

Let’s assume Racing Bicycle Company sells bikes and carts and that the sales mix between the two products remains the same.The Concept of Sales Mix • Sales mix is the relative proportion in which a company’s products are sold. cost structures. . The McGraw­Hill Companies. • Different products have different selling prices. McGraw­Hill/Irwin Copyright © 2006. Inc. and contribution margins.

000 = 48. provides the following information: McGraw­Hill/Irwin $265.2% (rounded) $550.000 Copyright © 2006. The McGraw­Hill Companies.Multi-product break-even analysis Racing Bicycle Co. Inc. .

000 = 48.Multi-product break-even analysis Break-even sales Fixed expenses = CM Ratio $170. Inc.2% = $352.697 McGraw­Hill/Irwin Copyright © 2006. The McGraw­Hill Companies. .

inventories do not change (units produced = units sold). Costs are linear. The McGraw­Hill Companies. the sales mix is constant. McGraw­Hill/Irwin Copyright © 2006. . Inc. In manufacturing companies.Key Assumptions of CVP Analysis Selling price is constant. In multi-product companies.

. Inc. The McGraw­Hill Companies.End of Chapter 6 McGraw­Hill/Irwin Copyright © 2006.