CostVolumeProfit Analysis: Additional Issues

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Cost-Volume-Profit AnalysisAdditional Issues

• Chapter 6

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Breakeven in Multi-product Situations

• Breakeven point depends on a weighted average
  contribution margin (percentage)
• Relative mix of the products (sales mix)
• Contribution margins of each product
• Breakeven point is then allocated to the products
  in their original sales mix percentages

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Breakeven in Multi-product Situations
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Sales Mix with Limited Resources

• What should we produce when limited resources
  prevent us from satisfying the demand for our
  products?
• Use the limited resource in the most effective
  manner
• Highest contribution margin per unit of the
  resource

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Sales Mix with Limited Resources
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Operating Leverage

• Relative proportion of fixed and variable costs
  determines how widely profits will fluctuate with
  changes in sales
• Low variable cost, high fixed cost ? wide
  fluctuations
• Each unit contributes a lot to income
• High variable cost, low fixed cost ? small
  fluctuations
• Each unit contributes little to income

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Operating Leverage
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Operating Leverage

• Degree of operating leverage
• Multiplier effect of a change in sales on net
  income
• Contribution margin / net income
• Percent change in sales operating leverage
  percent change net income

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Operating Leverage

• Company A
• 400,000 / 100,000 4
• The 20 increase in sales resulted in an 80
  increase in net income (from 100,000 to
  180,000)
• Company B
• 200,000 / 100,000 2
• The 20 increase in sales resulted in a 40
  increase in net income (from 100,000 to 140,000)

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