It is a chart that shows the profit or loss at all levels of output and sales. This chart plots a single line depicting the profit or loss at each level of activity. The procedure of computing break-even point of a multi-product company is a little more complicated than that of a single product company. The following underlying assumptions will limit the precision and reliability of a given cost-volume-profit analysis. The company must produce and sell 800 units of Product A, 1,600 units of Product B, and 4,000 units of Product C in order to break-even. If we know we need $125,000 in sales to break even but the sales mix is different from what we budgeted, the numbers will appear quite different (as you should have noticed in the video).
This assumption allows us to calculate a weighted average contribution per unit or batch and/or CS ratio which can be used to solve Break-even, margin of safety and target profit problems. The concept of a break-even chart is similar to a cost behavior chart, but with sales revenue shown as well. If the chart also indicates the budgeted volume of sales, the margin of safety can be shown as the difference between the budgeted volume and the break-even volume of sales.
Multi-product Break-even (CVP) analysis
If the sales mix is different from our estimate, the break even point will not be the same. One way that businesses can easily conduct this analysis is by building a CVP sensitivity analysis template. The company must generate sales of $80,000 for Product A, $192,000 for product B, and $200,000 for Product C, in order to break-even. Long story short, there are 3 steps to calculate the multi-product break-even point.
For companies that produce more than one product, break-even analysis may be performed for each type of product if fixed costs can be determined separately for each product. The loss becomes smaller as sales volume increases, due to the higher contribution as sales volume increases. Break-even point is then reached and profits are made at sales volumes above the break-even point. The method of calculating break-even point of a single product company has been discussed in the break-even point analysis article.
Multi-product break-even analysis
We must also proceed under the assumption that the sales mix remains constant; if it does change, the CVP analysis must be revised to reflect the change in sales mix. For the sake of clarity, we will also assume that all costs are companywide costs, and each product contributes toward covering these companywide costs. Although you are likely to use cost-volume-profit analysis for a single product, you will more frequently use it in multi-product situations. The easiest way to use cost-volume-profit analysis for a multi-product company is to use dollars of sales as the volume measure. For CVP purposes, a multi-product company must assume a given product mix or sales mix. Product (or sales) mix refers to the proportion of the company’s total sales for each type of product sold.
In order to perform a break-even analysis for a company that sells multiple products or provides multiple services, it is important to understand the concept of a sales mix. Sales mix is important to business owners and managers because they seek to have a mix that maximises profit, since not all products have the same profit margin. Businesses can maximise their profits if they are able to achieve a sales mix that is heavy with high-margin products, goods, or services. If a company focuses on a sales mix heavy with low-margin items, overall profitability will often suffer.
5 Multi-product Breakeven Analysis
In this article, we would explain the procedure of calculating break-even point of a multi-product company. So we need to break up the 180 units into the 3 different products using our mix of 60%. Management might want to know what the volume of sales must be in order to achieve a target profit. Using a forecasted or estimated contribution margin income statement, we can verify that the quantities listed will place West Brothers at break-even. For Multi-product margin of safety, the break-even point can be compared to the budgeted activity level using batches, units or revenue.
- Notice that the composite contribution margin is based on the number of units of each item that is included in the composite item.
- Using a forecasted or estimated contribution margin income statement, we can verify that the quantities listed will place West Brothers at break-even.
- In computing for the multi-product break-even point, the weighted average unit contribution margin and weighted average contribution margin ratio are used.
- The concept of a break-even chart is similar to a cost behavior chart, but with sales revenue shown as well.
- In order to perform a break-even analysis for a company that sells multiple products or provides multiple services, it is important to understand the concept of a sales mix.
- The easiest way to use cost-volume-profit analysis for a multi-product company is to use dollars of sales as the volume measure.
Sales mix is important to business owners and managers because they seek to have a mix that maximizes profit, since not all products have the same profit margin. Companies can maximize their profits if they are able to achieve a sales mix that is heavy with high-margin products, goods, or services. If a company focuses on a sales mix heavy with low-margin items, overall company profitability will often suffer. For computing break-even point of a company with two or more products, we must know the sales percentage of individual products in the total sales mix. This information is used in computing weighted average selling price and weighted average variable expenses.
7 Break Even Point for Multiple Products
The weighted average C/S ratio is useful in its own right, as it tells us what percentage each $ of sales revenue contributes towards fixed costs. The break-even point of a business is calculated using break-even analysis. However, we will consider multi-product break-even analysis in this article. The Break-even point is the point where the business breaks even i.e., it experiences no profit no loss. At this point, the total costs of the business are covered by the total revenue the business generates. Another way of putting this is that the contribution earned by the business is just enough to cover the fixed costs.
Multi-Product Break-even Analysis
The determination of the break-even point in CVP analysis is easy once variable and fixed costs are determined. The calculation of a multi-product break-even point is almost the same as a single-product break-even point. The only difference is that the denominator is the weighted average contribution per unit (for break-even point in units) or weighted average contribution to sales (C/S) ratio (for Break-even Revenue). The necessary contribution to earn the target profit is the target profit plus the fixed costs. The activity level required to achieve the necessary contribution may be found using contribution per unit, contribution per batch or the CS ratio.
If we change the composition of the basket, then the composite contribution margin would change even though contribution margin of the individual items would not change. Let’s look at an additional example and see how we find the break-even point for this weighted average basket. Break-even analysis for multiple products is made possible by calculating weighted average contribution margins. In computing for the multi-product break-even point, the weighted average unit contribution margin and weighted average contribution margin ratio are used. Let’s look at an additional example and see how we find the break-even point for a composite good. Using a forecasted or estimated contribution margin income statement, let’s verify that the break even sales in units at Soul Sisters is correct.
