CVP Analysis (Multi-product)

When considering output decisions (e.g. how many units to make and sell) in the short term, then decision making often focuses on contribution. This page considers how to apply cost volume profit analysis to scenarios with more than one product.

Methodology

STEP 1 : Calculate the C/S ratio of each product being sold, and rank the products in order of profitability.

STEP 2 : Draw the graph, showing cumulative sales on the x-axis. For example, if we assume 3 products X, Y and Z, then the following graph could be drawn , with 'V' representing the total sales. At an output of 0, the profit earned will amount to the company's fixed costs, represented by point k on the chart.

STEP 3 : Draw the line km, that represents the profit earned by product X. The slope of the line is determined by the contribution per unit earned on sales of that product.

STEP 4 : Draw the line mn, that represents the profit earned by product y, which has a lower contribution per unit than product X. The line nj is the profit earned by the least profitable product, product Z.

STEP 5 : Draw the line joining points k and j :it reflects the average profitability of the three products, and each point on that line represents the profit earned for the associated output, assuming that the three products are sold in the standard product mix, i.e. the mix implied in the construction of the chart. Accordingly, the indicated breakeven point only applies if the products are sold in the standard product mix.

It can also be seen that breakeven can also occur at lower levels of output, provided the proportions of the products are changed. For example, the point B where the line kmnj crosses the horizontal axis indicates a possible breakeven point.

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Tags:	CVP;multi-product