Sales Mix

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Sales Mix

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Effect of sales mix on CVP

analysis. Unit contribution margin is replaced

with contribution margin for a

composite unit.A composite unit is composed of

specific numbers of each product inproportion to the product sales mix.

Sales mix is the ratio of the volumes ofthe various products.

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The resulting break-even formulafor composite unit sales is:

Break-even point

in composite units

Fixed costs

Contribution margin

per composite unit

=

Computing Multiproduct

Break-Even Point

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Window Doors

Selling Price $200 $500

Variable Cost 125 350Unit Contribution 75$ 150$

Sales Mix Ratio 4 1


Break-Even PointA company sells windows and doors. They sell

4 windows for every door.

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Step 1: Compute contribution margin per

composite unit.


Break-Even Point

Window Doors

Selling Price $200 $500Variable Cost 125 350

Unit Contribution 75$ 150$

Sales Mix Ratio 4 1

Composite C/M $300 $150

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Break-even point

in composite units

Fixed costs

Contribution margin

per composite unit

=

Step 2: Compute break-even point in

composite units.


Break-Even Point

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Break-even pointin composite units

Fixed costsContribution margin

per composite unit

=

Break-even point

in composite units

Rs.900,000

Rs.450 per

composite unit

=


composite units.


Break-Even Point

Break-even point

in composite units

= 2,000 composite units

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Sales Composite

Product Mix Units UnitsWindow 4 2,000 = 8,000

Door 1 2,000 = 2,000

Step 3: Determine the number of windows and

doors that must be sold to break even.


Break-Even Point

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Windows Doors Combined

Selling Price $200 $500

Variable Cost 125.00 350.00

Unit Contribution 75.00$ 150.00$Sales Volume 8,000 2,000

Total Contribution 600,000$ 300,000$ 900,000$

Fixed Costs 900,000

Income $ 0

Step 4: Verify the results.

Multiproduct Break-Even

Income Statement

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Case StudyMulti products Company has a sales ratio of 2:3:5 for

models X, Y and Z respectively. Total fixed cost for

the year are Rs 200000.The sale price, variable costand contribution margin associated with each productare as follows:

M-X M-Y M-Z

Sales Price 50 25 10Variable Cost 30 15 8

Contribution 20 10 2

Find out composited BEP and the no. of individual

product required at B.E.P is then determined.

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Case the no. of individual product required a

B.E.P is then determined.

M-X M-Y M-Z

Sales Price 50 25 10

Variable Cost 30 15 8Contribution 20 10 2

Sales Mix 2 3 5

Total contribution 40 30 10 80

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Break-even pointin composite units

Fixed costsContribution margin

per composite unit

=

Break-even point

in composite units

Rs200,000

Rs.80 per composite

unit

=


composite units.


Break-Even Point

Break-even point

in composite units

= 2500 composite units

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the no. of individual product required at

B.E.P is then determined.In order to fill 2500 baskets, it will take the following Units for

each model.

Model X =2500 x 2=5000 unitsModel Y = 2500 x 3 = 7500 units

Model Z = 2500 x 5 = 12500 units

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Limiting of key factorA limiting or key factor may be defined as the factorin the activities of an undertaking, which at aparticular point in time or over a period will limit thevolume of output. Examples of limiting factors are:

Sales

Materials

Labour Production capacity/machine hours

Financial resources

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Example:-Product A B

Contribution per unit Rs.15 Rs.20

Which Product will be more profitable

A or B??

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Contribution per unit of key factor

Product A B


Product B , will be more profitable

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Contribution per unit of key factor

Product A B


Material required per unit 3kg 5kg

Contr. per kg of material Rs.5 Rs.4Product A, will be more profitable

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Limiting Key Factor-Material

Lets take an example that the materialavailable is only 15000 kg

A B

No. of units that 5000 3000

can be produced

Contribution 65000 60000

Product A, is more profitable

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Problem:-

The following particulars are extracted fromthe records of a company

A B

Selling Price (per unit) 100 120

Consumption of material p.u 2kg 3Kg

Material Cost Rs. 10 Rs. 15

Direct Wages Rs. 15 Rs.10

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Problem:-

A B

Direct Expenses 5 6

Machine hours used p.u 3 2

Overhead expenses p.u:

Fixed Rs. 5 Rs. 10Variable Rs. 15 Rs. 20

Direct wages per hour is Rs.5

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Problem

a) Comment on the profitability of each product (bothuse the same raw material) when:

1. Total Sales potential in units is limited

2. Total Sales Potential in value is limited3. Raw material is in short supply and4. Production capacity in terms of machine hours) is

the limiting factor.

b) Assuming raw material as the key factor, availabilityof which is 10000 kg and maximum sales potentialof each product being 3,500 units, find out theproduct mix which will yield the maximum profit

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SolutionStatement of Marginal Cost and Contribution

A B

Sales Rs.100 Rs.120

Less:- Marginal Cost

Direct Material 10 15

Direct Wages 15 10Direct Expenses 5 6

Variable OHD 15 20

45 51

Contribution 55 69

P/V Ratio 55% 57.5%Contribn per kg of material 27.5 23

Contribn per machine hour 18.3 34.5

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Comments

1. B is more profitable as its making a largercontribution per unit as compared to A

2. B is more profitable as its P/V ratio is more3. A is more profitable as its contribution per

kg of material is more

4.

B is more profitable as it makes largercontribution per machine hour

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Solution

b) When Raw material is key factor.A is more profitable to produce as itscontribution per kg of material is higher thanB.

For 3500 units of A-material consumed will be3500 x 2 kg=7000 Kg. The balance 3000 kgcan be used to produce 1000 units(3000kg/3)

of B.Thus the product mix is 3500 units of A and

1000 units of B

Sales Mix

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