CHAPTER FIVE

PART -I

Cost Concepts &

CVP Analysis

1
Introduction to Management & Cost Accounting

 Management and Cost accounting are two very

crucial branches of accounting discipline. Both
strive to provide accurate and relevant data
information to the management in decision making
and improving operational performance of an
organization.
 Both of them are used by most of the organizations
for better functioning and aims to maximize profit
by managing revenues and expenses.
 Themain user of both management accounting and
cost accounting is an organization’s internal
management.
 Discussion

What is the difference between cost accounting and

management accounting?
Cost accounting:
 Cost Accounting is a method of collecting,
recording, classifying and analyzing the information
related to cost.
 Generally, the objective of cost accounting are”
 Estimation of costs
 Ascertainment of costs
 Cost control ,Cost reduction
 Determining selling price and
 Facilitating preparation of financial statement
Management Accounting
 Management accounting involves furnishing of the
accounting data to the management to facilitate decision
making and improve the efficiency within the
organization and finally helps in achieving the goals of the
organization.

 Management Accounting refers to the preparation of

financial and non-financial information for the use by
management of the company. It is also termed as
managerial accounting.

 The information provided by it is helpful in making

policies and strategies, budgeting, forecasting plans,
making comparisons and evaluating the performance of
the management and used by the internal management
 The difference between management and cost
accounting are as follows:
Cost Accounting Management Accounting
• The main objective of cost • The primary objective of
accounting is to assist the management accounting is to
management in cost provide necessary information to
control and decision- the management in the process of
making. its planning, controlling, and
performance evaluation, and
decision-making.
• Cost accounting system • Management accounting uses both
uses quantitative cost data quantitative and qualitative data. It
that can be measured in also uses those data that cannot be
monetary terms. measured in terms of money.
• Determination of cost and • Efficient and effective performance
cost control are the of a concern is the primary role of
• Cost-related
primary rolesdata as
of cost • Management
management accounting
accounting.is based
obtained from financial
accounting. on the data as received from
accounting is the base of financial accounting and cost
cost accounting. accounting.
• This accounting • Management
system is concern accounting is concern
with both past as well with the transaction
as present fact and relating to the future.
figures
• The scope of cost • The scope of
accounting is not management
broad. It deals accounting is broad.
primarily with cost Financial accounting,
ascertainments and cost accounting,
cost control. statistics etc. are
related with
management
accounting.
In simple terms, cost accounting is
one of the sub-sets of management
accounting. As a result, the scope and
reach of management accounting are
much broader and extensive than
cost accounting.

Management accounting includes a lot of

aspects of business such as decision
making, strategizing, planning,
performance management, risk
management, etc. Cost accounting, on
the other hand, only revolves around
cost computation, cost control, and
 Cost concepts and classification
 Cost is amount that has to be paid or given up in
order to get something. Simply, cost is a resource
sacrificed or forgone to achieve a specific
objective.
 A Cost object is anything for which a separate
measurement of costs is desired. i.e. something to
which costs are assigned. Example; product,
department, process etc.
 Cost pool is a grouping of individual cost items by
departments or service center possessing identical
nature. For example, the cost of maintenance
department is accumulated in a cost pool and then
allocated to those departments using its service.
 Cont….
Cost accumulation: is the collection of costs in
some organized way by means of an accounting
system, i.e., by some natural or self descriptive
classification.
Eg. material cost, labor cost, fuel,
Advertisement cost etc.

 Cost assignment is the process of allocation of

costs to the activities or cost objects. It is a general
term that includes:
a. Tracing accumulated costs: For direct costs
b. Allocating accumulated costs: For indirect
costs
Cost classification
Recall that one of the purposes of managerial
accounting is to provide management with
information about the costs of products or services.
Companies incur different types of costs that can be
classified based on certain characteristics.
Each cost classification provides management with a
different type of information to be applied in
analysing different business situations and these
costs are classified differently according to the
immediate need of management and other users.
Costs can be classified commonly based on the
following attributes:
Based on cost assignment (by
Traceability):
1. Direct cost:
Direct costs of a cost object are
related to the particular cost object
and can be traced to it in an
economically feasible (cost-
effective) way.
For example, the cost of steel or
tires is a direct cost of a car and
salary of a workers who directly
 Cont….
2. Indirect cost:
Indirect costs of a cost object are
related to the particular cost
object but cannot be traced to it
in an economically feasible (cost-
effective) way.
For example, the salaries of plant
administrators (including the
plant manager) who oversee
production of the many different
types of cars produced at the
Based on Cost-Behavior
Cost behavior refers to how a cost
will react to changes in the level of
activity. The most common
classifications are:
Variable costs
Fixed costs
Mixed costs

Variable Costs:
Are costs that change
proportionately (in total) with the
activity level within a relevant
 Cont….
Fixed Costs:
Are costs that do not change in total as
activity level changes within a relevant
range of activity.
Mixed Costs:
A mixed cost is one that contains both
variable and fixed cost elements
together.
Mixed cost is also known as semi
variable cost.
Examples of mixed costs include
electricity and telephone bills. A portion
of these expenses are usually consists
 Total Variable and Fixed
Costs

$
t
Cos Total Fixed Cost
l e
ir ab
l Va
ta
To

Number of units
Number of units
 Variable and Fixed Costs Per
Unit

$ $

Pe
rU
Per Unit Variable Cost ni t
Fix
e dC
os
t

Number of units Number of units

A) Based on the function of cost:
Manufacturing costs:
 are those costs that are directly
involved in manufacturing of products
and services. Manufacturing cost is
divided into three broad categories by
most companies.
a) Direct materials cost
b) Direct labor cost
c) Manufacturing overhead cost.
a) Direct Material: it refers to those
materials which become an integral part
of the final product and can be easily
traceable to specific physical units.
 Cont….
b) Direct Labour: It is defined as the
wages paid to workers who are engaged
in the production process and whose time
can be conveniently and economically
traceable to specific physical units. Direct
labor is sometime called touch labor,
since direct labor workers typically touch
the product while it is being made.
c) Manufacturing Overhead Cost: is the
third element of manufacturing cost, that
is not directly associated with a product,
that is , all costs other than direct
materials cost and direct labour cost. It
includes the cost of indirect material and
 Cont….
Indirect Labor: Labour employed for the
purpose of carrying out tasks incidental to
goods produced or services provided is called
indirect labour or indirect wages.
In short, wages which cannot be directly
identified with a job, process or operation, are
generally treated as indirect wages.
Indirect Material: all materials which are used
for purpose ancillary to the business and which
cannot conveniently be assigned to specific
physical units are known as `indirect materials’.
Oil, grease, consumable stores, printing and
stationery material etc.

Manufacturing overhead must be

mathematically allocated to each unit of
 Cont….
Non-manufacturing Costs:
Non-manufacturing costs are those costs
that are not incurred to manufacture a
product. Generally non-manufacturing
costs are further classified into two
categories.
a) Marketing and Selling Costs
b) Administrative Costs
a) Marketing and Selling Costs:
Marketing or selling costs include all costs
necessary to secure customer orders and
get the finished product into the hands of
the customers. These costs are often
called order getting or order filling costs.
 Cont….

b) Administrative costs: include

all executive, organizational, and
clerical costs associated with general
management of an organization rather
than with manufacturing, marketing,
or selling.
Examples of administrative costs
include executive compensation,
general accounting, secretarial, public
relations, and similar costs involved in
the overall, general administration of
the organization as a whole.
 Summary of manufacturing and non-
manufacturing costs
Manufacturing Costs

Direct Materials:

Materials that can be physically and conveniently traced to a product, such as wood in a table.

Direct Labor:

Labor costs that can be physically and conveniently traced to a product such as assembly line
workers in a plant. Direct labor is also called touch labor cost.
Manufacturing Overhead:

All costs of manufacturing a product other than direct materials and direct labor, such as indirect
materials, indirect labor, factory utilities, and depreciation of factory equipment.
Non-manufacturing Costs
Marketing or selling costs:

All costs necessary to secure customer orders and get the finished product or service into the hands
of the customer, such as sales commission, advertising, and depreciation of delivery equipment and
finished goods warehouse.
Administrative Costs:

All costs associated with the general management of the company as a whole, such as executive
compensation, executive travel costs, secretarial salaries, and depreciation of office building and
equipment.
 Prime and Conversion Costs
Another way of classifying
manufacturing cost as:
Prime costs are defined as the
expenditures directly related to
creating finished products: direct
material plus direct labor.
Conversion costs are the costs to
convert raw materials into finished
goods: direct labor plus manufacturing
overhead.

Prime cost = DM + DL
Conversion cost = DL + MOH
Based on their association with the
product:
Product Costs:
Product costs are traceable to the
product and include direct material,
direct labour and manufacturing
overheads. In other words, product
cost is equivalent to manufacturing
cost.
When products are sold, product costs
are recognized as an expense (cost of
goods sold). The costs of unsold
products remain in inventory and are
not expensed (i.e. not deducted from
revenue in calculating net income).
 Cont….
Period Costs:
Period costs are charged to the period
in which they are incurred and are
treated as expenses. They are incurred
on the basis of time, e.g., rent, salaries,
insurance etc. They cannot be directly
assigned to a product, as they are
incurred for several products at a time
(generally).

Period costs such as selling and

administrative costs are expensed (i.e.
deducted from revenue in calculating
net income) in the period they are
 Product Costs Versus Period
Costs
Product costs include
direct materials, direct
labor, and manufacturing
overhead called Balance
BalanceSheet
Sheet
manufacturing costs . Current
Currentassets
assetsand
and
as inventory
inventory
incurred
When
Whengoods
goods
Period costs are not Income are
aresold.
IncomeStatement
Statement sold.
included in product costs.
They are operating Revenue
Revenue
expenses on the income COGS
COGS
statement. Gross
Grossprofit
profit
Expenses
Expenses
as Net
Netincome.
income.
incurred
Cost Classifications on Financial Statements:

Merchandising and manufacturing

firms, both prepare financial statement
reports for creditors, stockholders, and
others to show the financial condition of
the firm and the firm's earnings
performance over some specified
intervals.
Merchandising companies simply
purchase goods and resale them to
customers. Financial statement reports
are therefore simple in case of
merchandising companies.
The financial statements prepared by
 Balance Sheet

The balance sheet or statement of

financial position of a manufacturing
company is similar to that of a
merchandising company. However, the
inventory accounts differ between two
types of companies.
A merchandising company has only one
type of inventory called merchandise
inventory, are goods purchased from
suppliers Merchandising
that are awaitingcompany
for resale to
Inventory Accounts
customers. Beginning Balance Ending Balance
Merchandising
$100,000 $150,000
Inventory
 Cont….
In contrast manufacturing
companies have three types of
inventories:-
1. Direct materials inventory: are raw
materials in stock and awaiting for use in
the manufacturing process
2.Work-in-process inventory: are
goods partially worked on but not yet
completed
A Manufacturing
3.Finished goodsCorporation
inventory: are
Inventory
goods completed butAccounts
not yet sold.
Beginning Balance Ending Balance
Raw materials $60,000 $50,000
Work in process $90,000 $60,000
Finished goods $125,000 $175,000
 COST-VOLUME-PROFIT (CVP) ANALYSIS

Cost-volume-profit
(CVP) analysis is the
study of the effects of changes in
costs and volume on a company’s
profits.
Cost- volume profit (CVP) Analysis is
one of the most powerful and simple
business planning and analysis
tools that managers have at their
command.
 Generally cost- volume profit (CVP)
analysis summarizes how profits,
 The CVP analysis helps to answer questions of the following
type;-

How much does a firm have to sell just

to cover its total costs?
How much does a firm have to sell to
reach its target profit?
How will a change in a firm’s fixed cost
affect its net income?
How much will a firm’s sales need to
increase so as to cover a planned
increase in advertising budget?
What price should a firm change to
cover its cost and provide for its
planned amount of profit?
Basic Components

Cost-volume-profit (CVP) Analysis helps

managers understand the
interrelation between cost, volume,
and profit in an organization by
focusing on interactions between the
following elements:
Key assumptions of CVP model
 Total costs can be separated into two
components: a fixed component that does not
vary with units sold and a variable component
that changes with respect to units sold.
 Selling price, variable cost per unit, and
total fixed costs (within a relevant range and
time period) are known and constant.
 When represented graphically, the behaviours of
total revenues and total costs are linear
(meaning they can be represented as a straight
line) in relation to units sold within a relevant
range (and time period).
 All units produced are sold.
 In multi-product companies, sales mix is
 Contribution margin:
Using contribution as a vital tool,
marginal costing helps to a great
extent in the managerial decision
making process.
It is a measure of the amount
available to cover the fixed costs
and there after to provide profits for
the enterprise.
It amount of revenue remaining
after deducting variable costs
The contribution margin per unit is
 Cont…
The difference between contribution
and fixed cost represents either profit
or loss. Contribution margin is calculated
as:

SP – VC = FC + Profit (-Loss)
CM = FC + Profit (-Loss)
CM = Selling Price – Variable
Cost
It is clear from the above equation that
profit arises only when contribution
exceeds fixed costs.
In other terms, the point of ‘no profit
Contribution margin Ratio
 Shows the percentage of each sales dollar
available to apply toward fixed costs and
profits.
 It shows the relationship between contribution
and sales and =is usually
CMR expressed
contribution x100 in
percentage. sales
or
CMR = S - V x100
s or
CMR = FC+ p(-L) x100
s or
CMR = (1 - Vc ) x100
s

 Thecontribution margin ratio suggests that

every birr of sales provides for to cover the
 CVP Income Statement
The CVP income statement is the short
form of the cost-volume-profit
income statement. It has similar
information like the more conventional
income statement. But it is planned for
showing the effects of changes in
volume and costs on a business’s
profit and then to make some
adjustment on components.
Common characteristic:
 A statement for internal use.
 Classifies costs and expenses as fixed or
 Example:

Assume that Addis company

produce and sells cosmetics. The
cosmetics is produced at a variable
cost of $80 per bottle and sold for
$100 per bottle. The company’s
fixed cost amount is $120,000 per
year. The plant capacity is 10,000
bottles of cosmetics annually.
Assume that the company sales
5,998, 5,999, 6,000, 6001 and
6,002 units.
Required: Prepare a contribution
 Contribution Income Statement
Number of bottles sold
5998 units 5999 units 6000 units 6001 units 6002 units 7500 units
Sales $599,800 $599,900 $600,000 $600,100 $600,200 $750,000
Variable 479,840 479,920 480,080 480,000 480,160 600,000
cost 119,980 120,000 120,020 120040 150,000
119,960
CM 120,000 120,000 120,000 120,000 120,000 120,000
Less FC (40) (20) 0 20 40 30,000
NI/NL
 The concept of contribution margin helps you to
easily understand the effect of change in
number of units sold on operating income.
 Thus from the above example, the contribution
margin is the amount remaining from sales revenue
after variable expense have been deducted. It is the
amount available to cover fixed costs and then to
provide profits for the period.
In general it important to mention the following
key points:
Once the break even point has been
reached net income will increase by
the unit contribution margin for our
case $20 for each additional unit
sold.
In other words for every bottle of
cosmetics sold in excess of the break
even point will add $20 to net income. As
sales increase from 6,000 to 6,001 net
income increases from 0 to $20 (i.e. $20X
1 bottle).
More over as sales increase from 6,001 to
6,002 bottles net income again rises by
Net income continues to increase by $20
per unit contribution margin each time an
additional unit is sold. This all shows
that beyond the break even point
the effect of an increase in sales on
net income can be quickly computed
by multiplying the amount of
increase by the contribution margin
per unit.

To estimate the effect of a planned

increase in sales on profit, the manager
can simply multiply the increase in units
sold by the unit contribution margin so as
Ifthe contribution margin is not sufficient
to cover the fixed expense, then a loss
occurs for the period. Each loss sale below
the break-even point will reduce the
company’s net income by the $20 unit
contribution margin. As sales falls below
6,000 bottle the company’s profitability
declines from zero to a loss of $20.
To summarize what has been said so far:
 If there is no sales, the company’s loss would
equal its fixed expenses
 Each unit sold reduces the loss by the
amount of unit contribution margin.
 Once the break-even point has been attained
each additional unit sold Increase the
 Break-Even Analysis

Break-even is the point where total

revenue equals total costs (both fixed
and variable).. At break-even point, a
company neither incurs a loss nor earns
a profit on operating activities.
At break-even, the company’s revenue
simply covers its costs. The profit at
break-even is zero.
The breakeven point (BEP) is that
quantity of output sold at which total
revenues equal total costs, that is, the
quantity of output sold that results in $0
of operating income.
 Cont…
 It can be computed or derived using:
1. The equation/mathematical
method
2. The contribution margin
method
3. The CVP graph method

 The equation method and the

contribution margin method are most
useful when managers want to
determine operating income at few
specific levels of sales .
 The graph method helps managers
 1. Equation Method
Break-even occurs where total sales equal variable
costs plus fixed costs; i.e., net income is zero.
Total revenue(sales) = Total cost + Profit
At the break-even point
profit equals zero
Therefore At Break even quantity =TR = TC

Revenue = Selling price (SP) x Quantity of units sold (Q)

Total cost = Total variable cost (TVC) + Total fixed cost (TFC)
Total Variable costs(TVC) = Variable cost per unit (VCU) x
Quantity of units sold (Q)

SP x Q = (VCU x Q) + FC
Break-even point in sales dollars = BE quantity x SP
2. Contribution Margin Method
Break-even point Fixed costs
=
in units sold or Qty Unit contribution margin

Break-even point in Fixed costs

=
total sales dollars/birr CM ratio
Contribution margin ratio = Contribution margin
Sales
3. Graph Method
In the graph method, we represent total
costs and total revenues graphically.
Each is shown as a line on a graph.
Because we have assumed that total
costs and total revenues behave in a
linear fashion, we need only two points
 Example:
The following data relates to a new
product due to be launched on the next
month:

 Selling price £20.00 per

unit
Forecast volume 120,000 units
Variable costs £16.00 per unit
Fixed costs £300,000
Required:
1. Determine the forecasted profit
2. Determine the BE point in quantity
and in sales pound
 Solution
Forecasted profit using equation method:
OI = (SP x Q) - (VCU x Q) – FC
= (20 x120,000) – (16 x 120,000)-
300,000
= 2,400,000 – 1,920,000 – 300,000
= 2,400,00 – (2,220,000)
= 180,000 profit
Forecasted profit using CM method:
OI = CMu x Q – FC
= (SP - CVu) x Q – FC
= (20 -16) x 120,000 – 300,000
= 4 x120,00 -300,000
Breakeven point using CM method:

Break-even Fixed costs

=
point in units ) Unit contribution margin

= 300,000/4 = 75,000 units

Break-even point in = Fixed costs

total sales pound/birr CM ratio

= 300,000/0.2 = 1,500,000 units

One of the most difficult tasks when
preparing a break-even chart is
determining the intervals between the
values (e.g. units of 15 for the volume).
You must also consider the overall size of
the graph, its position on the page and
give it a suitable heading.
In the above graph, the following steps
need to be taken:
 First, plot the total fixed costs, i.e. £300,000,
straight line across parallel to the x axis
(quantity axis);
 Next, plot the total costs, from £300,000 at
zero units to £2,220,000 (£1,920,000 +
£300,000) at 120,000 units;
Break-even is the point where
total costs equal total revenues.
Also at this point, the total cost
per unit equals the selling price
per unit.
To the left of the breakeven
point, the total costs exceed the
total revenues and represents the
loss segment, while to the
right of the break-even point
 Planning With Cost-Volume-Profit
Data
Managers of a company will prepare
different plans to be attained. It may
be planned to attain a desired level of
profit before tax or profit after tax
depending on the target managers
want to attain.
Using CVP analysis will help
managers to compute the number
of units they need to produce in
order to achieve the target profit
they planned.
The break-even point provides a
starting point for planning further
Example:
Based on the above example:
1. How many units the company
should produce and sale to
achieve its target before tax
profit of 500,000.
2. How many units the company
should produce and sale to
achieve its target after tax profit
of 420,000 and assume the
corporate income tax is 40%
Solution
The formula below indicates the
number of units a company
should produce and sale to attain
its target profit
Q = FC +before
PBT tax.
P-V

Q = 300,000 + 500,000 = 800,000

20 - 16 4

= 200,000
The formula in box gives the
number of units a company should
produce and sale so as to reach its
target after tax profit.
Profit after tax = (Profit before tax) – T (Profit
before tax)
PAT = PBT – T (PBT)
Rearranging the above equation
PAT = (PBT) (1– T)
PBT = Q PAT
= FC + PAT
(1-T) (1-T)
P-V
Q= 300,000 + 420,000
(1- 0.4)
20 - 16
Q = 300,000 + 700,000
4
Q = 1,000,000
4

Q = 250,000
 The Margin of Safety
The margin of safety is the excess of
budgeted or actual sales over the
break-even volume of sales.
 It states the amount by which sales can
drop before losses begin to be
incurred.
The margin of safety, therefore, gives
management a clue for how close
projected or actual operations are to the
organization’s break-even point.
If the actual (budgeted) sales are
significantly above the break-even
sales, there is high margin of safety
The margin of safety is a measure of
risk because it indicates the amount by
which sales can decline before a firm
suffers a loss.
The formula to calculate margin of
safety;
Absolute margin of safety = Total budgeted (actual) sales –
break-even sales
Relative margin of safety = Total budgeted (actual) sales-
Break-even sales
Total budgeted (actual)
sales

 The relative margin of safety is also

called the margin of safety
 Example: Assume that Addis Company is currently
selling 8,000 bottles of cosmetics. Required calculate
and interpret
1. The absolute margin of safety
2. The relative margin of safety
Solution;-
 The absolute margin of safety = Total budgeted (actual)
sales – break-even sales
Units in Birr
 Actual sales--------------- 8,000-----------(8,000 x $100) =
$800,000
 Less break-even sales--- 6,000-----------(6,000 x $100) =
$600,000
 Absolute margin of safety 2,000-----------(2,000 x $100)
= $200,000
2. The relative margin of safety= Total budgeted (actual) sales-
Break-even sales
Total budgeted (actual)
sales

= 8, 000 - 6,000 = 2,000 =

0.25 or 25%
8,000 8,000

Or = 2,000 X $100 = 25%

8,000 X $100
 Interpretation:- This margin of safety means
that at the current level of sales and with the
company’s current prices and cost structure, a
decline in sales of 2,000 bottles or $200,000 sales
Birr or by 25% would result in just breaking even.
Thus, the company will not suffer a loss. However,
 Multi-Product CVP Model
Sales mix is the quantities (or
proportion) of various products (or
services) that constitute total unit
sales of a company. That is, it refers
to the relative proportions in
which a company’s products are
sold.
In contrast to the single-product (or
service) situation, the total number
of units that must be sold to break
even in a multiproduct company
depends on the sales mix—the
Understanding a company's sales
mix is helpful for budgeting, for
managing a company's
inventory levels, and for
determining breakeven and
target profit levels.
In order to consider the sales mix
when calculating the breakeven
point in units for multiple products,
you must determine a weighted
average contribution margin
amount, which considers the
When calculating the breakeven
point or target profit in units, use the
weighted average contribution
margin (WACM) per unit.
When calculating the breakeven
point in sales dollars, use the
weighted average contribution
margin ratio (WACMR).
The weighted average contribution
margin per unit is used to calculate
the breakeven point in units because
it indicates the amount from
each unit sold that is available to
The formula to determine the
breakeven point in units for the
entire company(total units):
BEP in total Total FC
units = WACM per
The WACM per unitunit is calculated as
follows:
WACM per unit
= Total CM of all
products
Total units for all
products
To determine the breakdown of units
by product, use the unit sales mix:

X1 x (BEP in total
BE of X1 unit =
X1 + X2 units)

X2 x (BEP in total
BE of X2 unit =
X1 + X2 units)
To determine sales dollars at
breakeven, use the contribution
margin ratio instead of contribution
margin per unit in the profit
equation:
BEP in total sales Total FC
dollar = WACMR

The WACMR per unit is calculated as

WACMR =
follows:
To determine (SP1 the
– VC1breakdown
) X1 + (SP2 - of
VC 2) X2 dollars for each product, use
sales
the sales mix in sales dollars.
 illustration
Suppose ABC company produces
two products: cakes and
chocolates. The company has
provided the following expected
sales information for its products for
the month of May: chocolat Total
cakes
es
Expected 60 40 100
sales
Revenue, 12,000 4,000 16,000
Variable 7,200 2,800 10,000
cost
CM 4,800 1,200 6,000
Required:
1. Determine the BEP in total units
and BEP of each product.
2. Determine the BEP in total sales
dollar and BEP sales dollar of
each product.
1. Determine the BEP in total units
and BEP of each product.
Total CM of all products
WACM per unit =Total units for all products

(200 – 120) x 60 + (100 -70) x 40

60 + 40
(200 – 120) x 60 + (100 -70) x 40
60 + 40

4,800 + 1,200
100
6,000 = 60 WACM per unit
100
 BEP in total units =Total
FC
WACM per unit
BEP in total units 4,500= 75 units
= 60
To determine the breakdown of units
by product:
X1 x (BEP in total
BE of X1 unit =
X1 + X2 units)
60 X ( 75 units)
BE of cake unit
60 + 40
=
3X ( 75 units) = 45 units
5
 X2
BE of X2 unit = x (BEP in total
X1 + X2 units)
40 X ( 75 units)
BE of chocolaté unit
60 + 40
=
2X ( 75 units) = 30 units
5
 2. Determine the BEP in total sales dollar and BEP sales
dollar of each product.

BEP in total sales Total FC

dollar = WACMR
6,000
WACMR = = 0.375 = 37.5%
16,000
BEP in total sales 4,500 = $ 12,000
dollar = 0.375
BEP of cake in sales 3 x $ 12,000 = $ 9,000
dollar = 4
BEP of cake in sales 1 x $ 12,000 = $ 3,000
dollar = 4
Exercise
Trop Co. produces 3 kinds of fruit juice, whose costs, prices,
and expected sales levels are provided below:

Apple Orange Cranberry

Sales price $1.50 $2.00 $2.50
per unit
Variable cost $0.50 $0.50 $0.50
per unit
Expected 20,000 $20,000 10,000
sales units units units units
Trop Co. has a total fixed cost of $84,000.

Given the current sales mix, what is the overall Breakeven

quantity and sales dollar?