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CVP Analysis for Multi-Product Firms and Limitations of CVP Analysis

Dipesh Pandey
Dipesh Pandey

This document discusses using CVP (Cost-Volume-Profit) analysis for companies that produce multiple products. It provides an example of how to calculate a weighted average contribution margin per unit and break-even point for a biscuit company that produces 3 products. It also notes some limitations of CVP analysis, including that not all costs are perfectly fixed or variable, selling prices may not remain constant, and it assumes a single or constant product mix over a short time horizon.

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CVP Analysis for Multi- Product Firms and Limitations of CVP Analysis Presented by: Dipesh Raj Pandey MBA Spring 2017 First Term Roll: 17321
CVP Analysis for Multi-Product Firms
CVP Analysis for Multi-Product Firms Can CVP analysis work with this complication?
Nepal Biscuit Company Gazab Biscuit Mitho Biscuit Power Biscuit (A) Share in physical volume sold, % 30% 45% 25% (B) Selling price per unit, Rs Rs10 Rs8 Rs7 (C) Variable costs per unit, Rs Rs7 Rs6 Rs5 (D) Contribution margin per unit, Rs (B - C) Rs3 Rs2 Rs2 (E) Contribution margin ratio (D 歎 B) 0.30 0.25 0.29 (F) Fixed costs total, Rs Rs10,000
WCMPU Weighted Average Contribution Margin per Unit (WCMPU) = 30% x 3 + 45% x 2 + 25% x 2 = Rs 2.3 BEP (in units) = Fixed Cost Weighted Average Contribution Margin Per Unit = 10000/2.3 = 4,348 units (approx) Gazab Biscuit :4348*30% =1304 units Mitho Biscuit: 4348*45% = 1957 units Power Biscuit: 4348*25% = 1087 units
CVP Analysis for Multi-Product Firms Changes in product mix will result in different break even points. To reach the optimal product mix, the managers should try to market and sell more of those products whose CMPU and CM Ratio is higher
CVP Analysis for Multi-Product Firms BEP (in Rs): Fixed Costs/Weighted Average Contribution Margin Ratio
Limitations of CVP Analysis All costs cannot be classified as fixed and variable costs.
Limitations of CVP Analysis The behavior of costs is not necessarily linear within the relevant range.
Limitations of CVP Analysis Constant selling price for any volume in the short run.
Limitations of CVP Analysis CVP analysis does not work under the full costing method where inventory change occurs.
Limitations of CVP Analysis Single product or constant product mix.
Limitations of CVP Analysis Short term time horizon.
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CVP Analysis for Multi-Product Firms and Limitations of CVP Analysis

  • 1. CVP Analysis for Multi- Product Firms and Limitations of CVP Analysis Presented by: Dipesh Raj Pandey MBA Spring 2017 First Term Roll: 17321
  • 2. CVP Analysis for Multi-Product Firms
  • 3. CVP Analysis for Multi-Product Firms Can CVP analysis work with this complication?
  • 4. Nepal Biscuit Company Gazab Biscuit Mitho Biscuit Power Biscuit (A) Share in physical volume sold, % 30% 45% 25% (B) Selling price per unit, Rs Rs10 Rs8 Rs7 (C) Variable costs per unit, Rs Rs7 Rs6 Rs5 (D) Contribution margin per unit, Rs (B - C) Rs3 Rs2 Rs2 (E) Contribution margin ratio (D 歎 B) 0.30 0.25 0.29 (F) Fixed costs total, Rs Rs10,000
  • 5. WCMPU Weighted Average Contribution Margin per Unit (WCMPU) = 30% x 3 + 45% x 2 + 25% x 2 = Rs 2.3 BEP (in units) = Fixed Cost Weighted Average Contribution Margin Per Unit = 10000/2.3 = 4,348 units (approx) Gazab Biscuit :4348*30% =1304 units Mitho Biscuit: 4348*45% = 1957 units Power Biscuit: 4348*25% = 1087 units
  • 6. CVP Analysis for Multi-Product Firms Changes in product mix will result in different break even points. To reach the optimal product mix, the managers should try to market and sell more of those products whose CMPU and CM Ratio is higher
  • 7. CVP Analysis for Multi-Product Firms BEP (in Rs): Fixed Costs/Weighted Average Contribution Margin Ratio
  • 8. Limitations of CVP Analysis All costs cannot be classified as fixed and variable costs.
  • 9. Limitations of CVP Analysis The behavior of costs is not necessarily linear within the relevant range.
  • 10. Limitations of CVP Analysis Constant selling price for any volume in the short run.
  • 11. Limitations of CVP Analysis CVP analysis does not work under the full costing method where inventory change occurs.
  • 12. Limitations of CVP Analysis Single product or constant product mix.
  • 13. Limitations of CVP Analysis Short term time horizon.