ACCA F5

Performance Management
For exams from 1 September 2015 – 31 August 2016

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Chapter 3 • Single product CVP analysis
• Multi-product CVP analysis

Cost volume profit • CS ratio for multi-products

analysis • Target profits for multi-products

• Margin of safety for multi-products
• Multi-product breakeven charts
• Further aspects of CVP analysis

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 Syllabus learning outcomes (1)

• Explain the nature of CVP analysis.

• Calculate and interpret break even point and margin of
safety.
• Calculate the contribution to sales ratio, in single and
multi-product situations, and demonstrate an
understanding of its use.

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 Syllabus learning outcomes (2)

• Calculate target profit or revenue in single and multi-

product situations, and demonstrate an understanding of
its use.
• Prepare break even charts and profit volume charts and
interpret the information contained within each, including
multi-product situations.
• Discuss the limitations of CVP analysis for planning and
decision making.

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 Chapter overview

• You may have encountered CVP analysis in your earlier

studies, but in case your memory needs refreshing we
have included a brief reminder of the material you covered
at the beginning of the chapter.
• Because most organisations produce and sell a range of
products we are going to look at what is known as multi-
product breakeven analysis.
• We will see how to perform calculations you will be familiar
with from your earlier studies such as the contribution to
sales (C/S) ratio and the margin of safety, applied to multi-
product situations.

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 Chapter summary diagram

CVP analysis

Single product Multi-product

Break even point

Margin of safety
C/S ratio
Target profit
Break even chart
Profit volume chart
Limitations

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 Tackling the exam

• Most of these techniques will be examined via calculations

but you may have to interpret graphs and discuss the
limitations of the analysis.
• You will be required to use information from the scenario
and apply the relevant formula.
• You may be required to prepare a chart from information
provided in a scenario.

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 Single product CVP analysis (1)

Break-even chart
… diagrammatically shows the relationship between
revenue, costs and sales volume.
• Plot total revenue
• Plot total costs

Profit-volume chart
… illustrates the relationship of costs and profit to sales
and emphasises the impact of volume changes on profit.
(a) Calculate total fixed costs = loss when sales are 0
(b) Calculate profit at target sales volume
(c) Plot both points and join with a straight line

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 Single product CVP analysis (2)
Fixed costs
Break even point =
Unit contribution
Contribution / unit
Contribution/Sales ratio =
Selling price / unit
Fixed costs
Break even revenue = or Break even point  selling price/unit
C / S ratio

Margin of safety = Budgeted sales – Break even sales

Budgeted sales  Breakeven sales

Margin of safety (%) =
Budgeted sales
Fixed costs + Target profit
Output required for target profit =
Unit contribution

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 Multi-product CVP analysis (1)

Break-even chart
Calculate cumulative revenues and costs and plot in
order of C/S ratio
or
Individual products individually plotted to allow
comparison of profitability.

Profit-volume chart
Calculate cumulative revenues and cumulative profit
and plot in order of C/S ratio

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 Multi-product CVP analysis (2)

Fixed costs
Break even point =
Weighted average unit contribution

Fixed costs
Break even revenue =
Weighted average C / S ratio

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 Multi-product CVP analysis (3)

How to calculate a multi-product breakeven point

• Calculate the contribution per unit
• Calculate the contribution per mix
• Calculate the breakeven point in number of mixes
• Calculate the breakeven point in units and revenue

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 Multi-product CVP analysis (4)

Example – J Co – used throughout this chapter

• J Co produces and sells two products.
• The M sells for $7 per unit and has a total variable cost of
$3 per unit.
• The N sells for $15 per unit and has a total variable cost of
$5 per unit.
• For every five units of M sold, one unit of N will be sold.
• Fixed costs total $30,000.

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 Multi-product CVP analysis (5)

Example answer
• Contribution: M = $4 N = $10
• Contribution from sale of std mix: ($4 × 5) + ($10 × 1) =
$30
• Fixed costs ÷ contribution per mix = $30,000 ÷ $30 = 1,000
mixes
• M 1,000 × 5 = 5,000 units 5,000 × $7 = $35,000 revenue
• N 1,000 × 1 = 1,000 units 1,000 × $15 = $15,000 revenue
• Total breakeven revenue = $50,000

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 CS ratio for multi-products (1)

How to calculate a multi-product C/S (or profit volume or

P/V) ratio
• Calculation of breakeven sales: Approach 1
• Calculate the revenue per mix
• Calculate the contribution per mix
• Calculate the average C/S ratio
• Calculate the total breakeven point
• Calculate the revenue ratio per mix
• Calculate the breakeven sales

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 CS ratio for multi-products (2)

Example
• Revenue per mix ($7 × 5) + ($15 × 1) = $50
• Contribution per mix ($4 × 5) + ($10 × 1) = $30
• Average C/S ratio ($30 ÷ $50) × 100% = 60%
• Fixed costs ÷ C/S ratio = $30,000 ÷ 0.6 = $50,000
• ($7 × 5) : ($15 × 1) = 35 : 15 or 7 : 3
M = $50,000 × 7/10 = $35,000
N = $50,000 × 3/10 = $15,000
$50,000

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 CS ratio for multi-products (3)

• Calculation of breakeven sales: Approach 2

• You may just be provided with individual C/S ratios

Example
C/S ratio of X = 45%
C/S ratio of Y = 35%
Ratio of sales = 3:4
(45% × 3) + (35% × 4)
Average C/S ratio =
7
= 39.3%

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 CS ratio for multi-products (4)

Target contributions
Example
• J Co (from earlier example) wishes to earn contribution of
$500,000
• Contribution / sales = 0.6  $500,000 / sales = 0.6
• Sales revenue = ($500,000 ÷ C/S ratio) = $833,333
• Any change in the proportions of products in the mix will
change the contribution per mix
• Also the average C/S ratio and hence the breakeven point

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 CS ratio for multi-products (5)

Most profitable mix option

• J Co (from our example) has the option of changing the
sales ratio to 2M to 4N.
• Which is the optimal mix?
1) Calculate breakeven point in number of mixes.
2) Calculate breakeven point in units and revenue.

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 CS ratio for multi-products (6)
Example (J Co)
1. Mix 1: 1,000 mixes (calculated earlier)
Mix 2: Contribution per mix = ($4  2) + ($10  4)
= $48
Breakeven point = $30,000 ÷ $48
= 625 mixes
2. Mix 1: $50,000 (calculated earlier)
Mix 2: M 625  2 = 1,250 units
1,250  $7 = $8,750 revenue
N 625  4 = 2,500 units
2,500  $15 = $37,500 revenue
Total breakeven revenue = $46,250
Mix 2 is preferable because it requires a lower level of sales to break even (because it has
higher average contribution per unit sold of $48/6 = $8 compared with $30/6 for mix 1).

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 CS ratio for multi-products (7)

Changing the product mix

• ABC Co sells products Alpha and Beta in the ratio 5:1 at
the same selling price per unit.
• Beta has a C/S ratio of 66.67% and the overall C/S ratio is
58.72%.
• How do we calculate the overall C/S ratio if the mix is
changed to 2:5?

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 CS ratio for multi-products (8)

1. Calculate the missing C/S ratio

• Calculate original market share (Alpha 5/6, Beta 1/6).
• Calculate weighted C/S ratios.
Beta: 0.6667  0.1667 = 0.1111
Alpha: 0.5872 – 0.1111 = 0.4761
• Calculate the missing C/S ratio.
Alpha Beta Total
C/S ratio 0.5713* 0.6667
Market share  0.8333  0.1667
0.4761 0.1111 0.5872
*0.4761/0.8333

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 CS ratio for multi-products (9)

2. Calculate the revised overall C/S ratio

Alpha Beta Total

C/S ratio (as in 1) 0.5713 0.6667
Market share (2/7:5/7)  0.2857  0.7143
0.1632 0.4762 0.6394

• The overall C/S ratio has increased because of the increase in the proportion
of the mix of the Beta, which has the higher C/S ratio.

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 Target profits for multi-products (1)

Target profits: Approach 1

• Calculate the contribution per mix.
• Calculate the required number of mixes.
• Calculate the required number of units and sales revenue
of each product.

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 Target profits for multi-products (2)

Example (J Co)
Suppose J Co wishes to earn profit of $24,900.
1. Contribution per mix $30 (as earlier)
2. (Fixed costs + required profit)/contribution per mix = $(30,000 +
24,900)/$30 = 1,830 mixes
$
3. M: (1,830  5) units for ( $7) 64,050
N: (1,830  1) units for ( $15) 27,450
Total revenue 91,500
Variable costs (9,150  $3) + (1,830  $5) 36,600
Fixed costs 30,000
Profit 24,900

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 Target profits for multi-products (3)

Target profits: Approach 2

• Calculate average C/S ratio
• Calculate the required total revenue
Example
• C/S ratio 60% (from earlier)
• Required contribution ÷ C/S ratio = (Fixed costs + Profit) ÷
C/S ratio
• = $54,900 ÷ 0.6 = $91,500

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 Margin of safety for multi-products

Margin of safety
• Calculate the breakeven point in revenue
• Calculate the margin of safety
Example
• Suppose J Co has budgeted sales of $62,000
• Breakeven sales $50,000 (from earlier)
• Budgeted sales – breakeven sales
• = $(62,000 – 50,000) = $12,000
• = 19.4% of budgeted sales

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 Multi-product breakeven charts (1)

• A multi-product breakeven chart can only be drawn on the

assumption that the sales proportions are fixed.
• There are three possible approaches to preparing
multi-product breakeven charts:
1) Output in $ sales and a constant product mix
2) Products in sequence
3) Output in terms of % of forecast sales and a constant
product mix

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 Multi-product breakeven charts (2)

Breakeven chart

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 Multi-product breakeven charts (3)

Profit/volume chart
• J Co's sales budget is 6,000 units of M and 1,200 units
of N
• Revenue (6,000 × $7 + 1,200 × $15) = $60,000
• Variable costs (6,000 × $3 + 1,200 × $5) = $24,000
• On the chart, products are shown individually, from left to
right, in order of size of decreasing C/S ratio

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 Multi-product breakeven charts (4)

Profit/volume charts continued

Cum Cum
C/S ratio sales profit
$'000 $'000
N 66.67% 18 (18)*
M 57.14% 60 6**

* (1,200 × $15) – (1,200 × $5) – $30,000 = -$18,000

**(6,000 × $7) – (6,000 × $3) – $18,000 = $6,000

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 Multi-product breakeven charts (5)

P/V chart

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 Multi-product breakeven charts (6)

What the multi-product P/V chart highlights

• The overall company breakeven point
• Which products should be expanded in output (the most
profitable in terms of C/S ratio)
• Which products, if any, should be discontinued
• What effect changes in selling price and sales revenue
would have on breakeven point and profit
• The average profit (the solid line which joins the two ends
of the dotted line) earned from the sales of the products in
the mix

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 Further aspects of CVP analysis (1)

Advantages of CVP analysis

• Graphical representation of cost and revenue data can be
more easily understood by non-financial managers.
• Highlighting the breakeven point and margin of safety
gives managers an indication of the level of risk involved.

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 Further aspects of CVP analysis (2)

Limitations of CVP analysis

• It is assumed that fixed costs are the same in total and
variable costs are the same per unit at all levels of output.
• It is assumed that sales prices will be constant at all levels
of activity.
• Production and sales are assumed to be the same.
• Uncertainty in estimates of fixed costs and unit variable
costs is often ignored.

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 Question: CVP (1)

A company has fixed costs of $5,700 and variable costs per unit of $6.50.

Required

(a) If the selling price is $8/unit at all levels, what is the break even point
(in units)?
(b) What is the break even revenue?
(c) If budgeted sales are 5,000 units, what is the margin of safety in
units? What is the margin of safety as a %? What does this mean?
(d) What is the sales volume (in units) required to make a profit of
$10,000?

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 Answer: CVP (1)

Fixed costs 5,700

(a) BEP = = = 3,800 units
Contribution/unit 8 – 6.50
Break-even revenue = 3,800  $8 = $30,400
Contribution/unit $1.5
(b) C/S ratio = = = 0.1875
Sales price $8
$5,700
Break-even revenue = = $30,400
0.1875

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 Answer: CVP (1) (cont'd)

(c) Margin of safety= 5,000 – 3,800 = 1,200 units

1,200
or  100 = 24%
5,000
The sales volume must fall by 24% from budgeted level before a
loss is made.
10,000 + 5,700
(d) Sales volume = = 10,467 units
$1.50

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 Question: CVP (2)

Required
Sketch the break-even chart for Question CVP 1.

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 Answer: CVP (2)

Total costs at BEP = 5,700 + ($6.50  3,800) = $30,400

Total revenue at BEP = 3,800  $8 = $30,400

5,000  $8 = $40,000
(5,000  $6.5) + 5,700 =
$38,200

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 Answer: CVP (2) (cont'd)

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 Question: CVP (3)

Required
Sketch the profit-volume chart for Question CVP 1.

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 Answer: CVP (3)
Change in profit
Gradient of line = = Contribution per unit = $1.50
Change in volume

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 Question: CVP (4)

Required
(a) How would the line differ if the fixed costs increased to $6,500?
(b) Describe the impact on the break-even point if the selling point
increased to $10.

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 Answer: CVP (4)

(a) The line would start at – 6,500 and cross the x axis at 4.333 units
FC 6,500
using BEP = = = 4,333 units
unit cost 1.5
The gradient would not change.
(b) If selling price is $10
The contribution will become:
$10 – 6.50 = $3.50
So break-even point will be:

5,700
= 1,629 units
3.50

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 Question: CVP (5)

United Trading sells three products as follows.

Product Footballs Baseballs Rugby balls

$ $ $
Selling price 7 6 9
Variable costs 3 4.50 5
Budgeted sales (units) 2,000 4,000 3,000

Assume that the sales mix is 'fixed' in these proportions.

Fixed costs are $20,000.
Required
(a) What is the breakeven sales volume?
(b) What is the breakeven sales revenue?

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 Answer: CVP (5)

Product Footballs Baseballs Rugby balls

$ $ $
Selling price 7 6 9
Variable costs 3 4.50 5
Contribution 4 1.50 4

Fixed costs
Breakeven point =
Average contribution

$20,000
=
$2.889(W1)

= 6,923 units

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 Answer: CVP (5) (cont'd)

(W1) Average contribution = ($4  2) + ($1.50  4) + ($4  3)

2+4+3

= $2.889
The 6,923 units would be split as follows.

(a) (b)
Sales mix Units SP Revenue
$ $
Football 2 1,538 7 10,766
Baseball 4 3,077 6 18,462
Rugby ball 3 2,308 9 20,772
9 6,923 50,000

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 Question: CVP (6)

Required
Sketch a breakeven chart for Question CVP 5, indicating the
profit at budgeted sales.

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 Answer: CVP (6)

Budgets Costs Revenues

$ $
Footballs (2,000  $3) 6,000 (2,000  $7) 14,000
Baseballs (4,000  $4.50) 18,000 (4,000  $6) 24,000
Rugbyballs (3,000  $5) 15,000 (3,000  $9) 27,000
39,000 65,000
Fixed costs 20,000
Total costs 59,000

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 Answer: CVP (6) (cont'd)

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 Question: CVP (7)

Required
Sketch a multi-product P/V chart for Question CVP 5.

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 Answer: CVP (7)

Contribution Sales C/S ratio

$ $
Footballs 8,000 14,000 57.1%
Baseballs 6,000 24,000 25.0%
Rugby balls 12,000 27,000 44.4%
Plot in order of C/S ratio
Cumulative Cumulative
sales profit
Product $ $
Footballs 14,000 (12,000)
Rugby balls 41,000 0
Baseballs 65,000 6,000

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 Answer: CVP (7) (cont'd)

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 Formula summary (1)
Single-product breakeven analysis

Fixed costs
Break even point =
Unit contribution
Contribution / unit
Contribution/Sales ratio =
Selling price / unit

Fixed costs
Break even revenue =
C / S ratio

Budgeted sales  Break even sales

Margin of safety (%) =
Budgeted sales

Fixed costs + target profit

Output required for target profit =
Unit contribution

Contribution = Sales – All variable costs

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 Formula summary (2)

Multi-product breakeven analysis

Fixed costs
Break even point =
Weighted average unit contribution

Fixed costs
Break even revenue =
Weighted average C/S ratio

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 Question: Specimen exam

A company makes a single product which it sells for $2 per

unit.
Fixed costs are $13,000 per month.
The contribution/sales ratio is 40%.
Sales revenue is $62,500.
What is the margin of safety (in units)?
A 15,000 C 30,000
B 16,250 D 31,250

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 Answer: Specimen exam

A 15,000

• Budgeted sales units = 62,500 ÷ 2 = 31,250 units

• Breakeven sales units
= Fixed costs / Contribution per unit
= 13,000 / (0.4 × $2) = 16,250 units
• Margin of safety = 31,250 – 16,250 = 15,000 units
or
• Break even sales = $13,000/0.40 = $32,500
• Margin of safety (sales revenue) = $62,500 – $32,500 = $30,000
• Margin of safety (units) $30,000/$2 = 15,000 units

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 Chapter summary (1)

1. Cost-volume-profit (CVP) analysis

Assumes:
 Constant selling price, variable costs and fixed costs

2. Single product CVP analysis

 Breakeven point = Fixed costs
Contribution per unit

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 Chapter summary (2)

3. Multi-product CVP analysis

 Multi-product breakeven analysis can only be performed if a
constant product sales mix is assumed.
 Breakeven point = Fixed costs
Weighted av. contribution per unit
 On a PV chart, products should be plotted individually in order of
the size of their c/s ratio.

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 Chapter summary (3)

4. CS ratio for multi-products

 How to calculate a multi-product C/S (or profit volume or P/V)
ratio:
─ Calculation of breakeven sales: Approach 1
─ Calculate the revenue per mix
─ Calculate the contribution per mix
─ Calculate the average C/S ratio
─ Calculate the total breakeven point
─ Calculate the revenue ratio per mix
─ Calculate the breakeven sales

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 Chapter summary (4)

5. Target profits for multi-products

 Target profits: Approach 1
─ Calculate the contribution per mix
─ Calculate the required number of mixes
─ Calculate the required number of units and sales revenue of
each product
 Target profits: Approach 2
─ Calculate average C/S ratio
─ Calculate the required total revenue

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 Chapter summary (5)

6. Margin of safety for multi-products

 Margin of safety
─ Calculate the breakeven point in revenue
─ Calculate the margin of safety

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 Chapter summary (6)

7. Multi-product breakeven charts

 A multi-product breakeven chart can only be drawn on the
assumption that the sales proportions are fixed.
 There are three possible approaches to preparing multi-product
breakeven charts:
─ Output in $ sales and a constant product mix
─ Products in sequence
─ Output in terms of % of forecast sales and a constant product
mix

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 Chapter summary (7)

8. Further aspects of CVP analysis

 Graphical representation of cost and revenue data can be more
easily understood by non-financial managers.
 Highlighting the breakeven point and margin of safety gives
managers an indication of the level of risk involved.
 It is assumed that fixed costs are the same in total and variable
costs are the same per unit at all levels of output.
 It is assumed that sales prices will be constant at all levels of
activity.
 Production and sales are assumed to be the same.
 Uncertainty in estimates of fixed costs and unit variable costs is
often ignored.

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