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18 -- Cost-Volume-Profit Analysis for Multiple Products - YouTube
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[Music]
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i'm larry walther and this is
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principlesofaccounting.com chapter 18.
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in the previous module we considered cvp
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or cost volume profit analysis for a
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single product
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oftentimes however a business will
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deliver multiple products each involving
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a unique contribution margin and
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contribution margin ratio and so in this
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module we are going to consider cvp
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analysis for firms that have multiple
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products
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recognize that businesses may offer a
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diverse product set of products
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each having a unique selling price in
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each having a unique contribution margin
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and we're going to use for example
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hummingbird feeders hummingbird feeders
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sells feeders and nectar packets now the
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feeders sell for fifteen dollars per
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unit and have a variable cost of
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production of ten dollars so they have a
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five dollar contribution margin per unit
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and the nectar packets sell for three
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dollars and have a one dollar cost of
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production and so their contribution
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margin is two dollars per unit if fixed
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cost for hummingbird feeders is one
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hundred thousand dollars the question is
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what is the break-even point
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to determine the break-even point we
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need to determine the product mix that
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is how many feeders do we sell relative
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to the nectar packets and some analysis
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has been done to determine that for
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every feeder sold there are 10 nectar
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packets sold and so we'll define a unit
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as 10 nectar packets and one feeder when
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we sell a unit we find that the
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contribution margin for that unit is
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five dollars for the feeder and 20
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dollars for the nectar packets that is
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two dollars times ten nectar packets so
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the unit contribution margin is twenty
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five dollars and we would need to sell
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four thousand units to break even that
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is our hundred thousand of fixed cost
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divided by the 25
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unitized contribution margin this would
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translate into sales of a hundred and
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eighty thousand dollars that is four
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thousand feeders selling at fifteen
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dollars apiece plus forty thousand
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nectar packets selling at three dollars
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a piece this assumes the given product
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mix ratio holds true if the hundred and
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eighty thousand of sales all came from
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feeders and no packets of nectar for
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example break even would not be reached
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alternatively we might reach break even
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sooner if we sell a higher proportion of
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the higher margin nectar packets
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an alternative way to calculate
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break-even sales is to divide the fixed
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cost by the weighted average
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contribution margin ratio in this case
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the fixed cost of a hundred thousand
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divided by the 0.555
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weighted average contribution margin
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ratio and i'll show you how to calculate
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that in a moment
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that amount gives us the break even
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sales of 180 thousand dollars so this is
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a shortcut way to calculate your
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break-even sales but we need to look at
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this next table to see how we're going
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to do that
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remember that the feeder sold for 15
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and the nectar packet sold for three
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dollars and so a unit sales fifteen
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dollars for a feeder and ten nectar
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packets at thirty dollars a unit sales
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is forty five dollars in total okay
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and 15 of the 45 or one third of that
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total relates to the
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feeder
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and
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two-thirds or 30 divided by 45 relates
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to the nectar packets so those are the
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product sales to total sales ratios as
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shown in the first column
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we then multiply those amounts times the
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product contribution margin ratio the
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product contribution margin for the
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feeders was five dollars divided by
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fifteen dollars and the product
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contribution for the nectar packets was
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much higher two dollars divided by three
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dollars when we multiply the product
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contribution margin ratios times the
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proportion of sales contributed by each
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product one-third for feeders and
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two-thirds of total sales dollars for
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nectar packets we'll get a weighted
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average ratio in the final column 0.111
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plus 0.444 gives us the weighted average
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contribution margin of 0.555
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which again we divide into the fixed
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cost to find the break-even point in
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sales dollars in closing this module i
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would want you to consider one
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additional topic and that is how selling
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expenses can influence contribution
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margins or profitability so let's
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consider a company that sells two
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products and the sales force earns five
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percent of sales product a has a hundred
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and twenty dollar sales price and
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product b has a one hundred dollar sales
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price
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also notice that i show the variable
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production cost product a costs a
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hundred dollars a unit to produce
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product b cost 70 dollars per unit to
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produce so the contribution margin on
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product a is 20
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and the contribution margin on product b
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is 30
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now if you were a sales person which
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would you rather sell
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well you would rather sell product a
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because five percent of 120 is more than
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five percent of a hundred so the sales
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person might have incentive to deliver
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or try to cause a customer to buy
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product a in lieu of product b this is
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not congruent with the interest of the
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entity necessarily because the
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contribution margin
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for the business is much higher on
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product b
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than it is on product a
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and so what these calculations show is
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how one needs to be very careful in
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terms of providing incentive
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compensations so that they align with
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the interest of the organization
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it probably does not make sense for the
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sales people to be essentially
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encouraged to sell a product that has a
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lower contribution margin the managerial
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accountant's role in this is to
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carefully evaluate the business and make
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recommendations relative to the strategy
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for running the business
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this is one of the valuable points of
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doing cost volume profit analysis within
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an organization
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