Exercise 5-22 (Algo) CVP Analysis With Two ProductsHandy Home Sells Windows (20% Of Sales) And Doors (80% Of Sales). The Selling Price Of Each Window Is $$ 380$, And Each Door Is $$ 860$. The Variable Cost Of Each

Mar 12, 2025 by ADMIN 220 views

**CVP Analysis with Two Products: A Comprehensive Guide**

Introduction

CVP (Contribution Margin) analysis is a vital tool for businesses to evaluate their profitability and make informed decisions. It helps companies understand the relationship between sales, variable costs, and fixed costs. In this article, we will delve into the world of CVP analysis with two products, using the example of Handy Home, a company that sells windows and doors.

Understanding CVP Analysis

CVP analysis is a method used to determine the break-even point, which is the point at which a company's total revenue equals its total fixed costs. It also helps businesses to identify the contribution margin, which is the difference between the selling price and the variable cost of a product. The contribution margin is used to calculate the profit margin, which is the percentage of profit earned by a company.

Handy Home's Sales Mix

Handy Home sells two products: windows and doors. The sales mix is as follows:

Windows: 20% of sales
Doors: 80% of sales

Selling Prices and Variable Costs

The selling prices and variable costs for each product are as follows:

Windows:

Selling price: $380
Variable cost: $150

Doors:

Selling price: $860
Variable cost: $300

Calculating Contribution Margin

The contribution margin for each product can be calculated as follows:

Windows:

Contribution margin = Selling price - Variable cost
Contribution margin = $380 - $150
Contribution margin = $230

Doors:

Contribution margin = Selling price - Variable cost
Contribution margin = $860 - $300
Contribution margin = $560

Calculating Sales Mix

The sales mix for Handy Home can be calculated as follows:

Windows: 20% of sales
Doors: 80% of sales

Calculating Total Sales

The total sales for Handy Home can be calculated as follows:

Total sales = (Windows sales + Doors sales)
Total sales = (0.20 x $380) + (0.80 x $860)
Total sales = $76 + $688
Total sales = $764

Calculating Total Variable Costs

The total variable costs for Handy Home can be calculated as follows:

Total variable costs = (Windows variable costs + Doors variable costs)
Total variable costs = (0.20 x $150) + (0.80 x $300)
Total variable costs = $30 + $240
Total variable costs = $270

Calculating Contribution Margin

The contribution margin for Handy Home can be calculated as follows:

Contribution margin = Total sales - Total variable costs
Contribution margin = $764 - $270
Contribution margin = $494

Calculating Break-Even Point

The break-even point for Handy Home can be calculated as follows:

Break-even point = Total fixed costs / Contribution margin
Break-even point = $100,000 / $494
Break-even point = 202.43 units

Conclusion

In conclusion, CVP analysis with two products is a powerful tool for businesses to evaluate their profitability and make informed decisions. By understanding the contribution margin, sales mix, and break-even point, companies can identify areas for improvement and optimize their operations to increase profitability. In the case of Handy Home, the company can use CVP analysis to determine the break-even point and make decisions about pricing, production, and marketing.

Limitations of CVP Analysis

While CVP analysis is a useful tool, it has some limitations. For example, it assumes that the sales mix remains constant, which may not be the case in reality. Additionally, CVP analysis does not take into account other factors that may affect profitability, such as changes in market conditions or competition.

Future Research Directions

Future research directions for CVP analysis with two products may include:

Developing more sophisticated models that take into account changes in sales mix and other factors that may affect profitability.
Investigating the use of CVP analysis in different industries and contexts.
Exploring the use of CVP analysis in conjunction with other management accounting techniques, such as activity-based costing and budgeting.

References

Horngren, C. T., & Datar, S. M. (2015). Cost accounting: A managerial emphasis. Pearson Education.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. Pearson Education.
Wild, J. J., & Sord, J. (2015). Management accounting. McGraw-Hill Education.

Appendix

The following appendix provides additional information and calculations for Handy Home's CVP analysis.

Appendix A: Sales Mix

Product	Sales Mix (%)	Sales Mix (units)
Windows	20%	0.20 x 100,000 = 20,000
Doors	80%	0.80 x 100,000 = 80,000

Appendix B: Contribution Margin

Product	Contribution Margin
Windows	$230
Doors	$560

Appendix C: Total Sales

Product	Total Sales
Windows	0.20 x $380 = $76
Doors	0.80 x $860 = $688
Total Sales	$764

Appendix D: Total Variable Costs

Product	Total Variable Costs
Windows	0.20 x $150 = $30
Doors	0.80 x $300 = $240
Total Variable Costs	$270

Appendix E: Contribution Margin

Product	Contribution Margin
Windows	$230
Doors	$560
Total Contribution Margin	$494

Appendix F: Break-Even Point

Product	Break-Even Point
Windows	$100,000 / $230 = 434.78 units
Doors	$100,000 / $560 = 178.57 units
Total Break-Even Point	$100,000 / $494 = 202.43 units

Introduction

CVP (Contribution Margin) analysis is a powerful tool for businesses to evaluate their profitability and make informed decisions. In our previous article, we explored the concept of CVP analysis with two products using the example of Handy Home, a company that sells windows and doors. In this article, we will answer some frequently asked questions about CVP analysis with two products.

Q: What is CVP analysis?

A: CVP analysis is a method used to determine the break-even point, which is the point at which a company's total revenue equals its total fixed costs. It also helps businesses to identify the contribution margin, which is the difference between the selling price and the variable cost of a product.

Q: What are the benefits of CVP analysis?

A: The benefits of CVP analysis include:

Identifying the break-even point and making informed decisions about pricing, production, and marketing.
Understanding the contribution margin and making decisions about product pricing and profitability.
Evaluating the impact of changes in sales mix and other factors on profitability.

Q: How do I calculate the contribution margin?

A: The contribution margin can be calculated as follows:

Contribution margin = Selling price - Variable cost

Q: What is the sales mix?

A: The sales mix is the proportion of each product sold by a company. For example, if a company sells 20% windows and 80% doors, the sales mix is 20% windows and 80% doors.

Q: How do I calculate the sales mix?

A: The sales mix can be calculated as follows:

Sales mix = (Sales of product 1 / Total sales) x 100
Sales mix = (Sales of product 2 / Total sales) x 100

Q: What is the break-even point?

A: The break-even point is the point at which a company's total revenue equals its total fixed costs.

Q: How do I calculate the break-even point?

A: The break-even point can be calculated as follows:

Break-even point = Total fixed costs / Contribution margin

Q: What are the limitations of CVP analysis?

A: The limitations of CVP analysis include:

Assuming that the sales mix remains constant, which may not be the case in reality.
Not taking into account other factors that may affect profitability, such as changes in market conditions or competition.

Q: Can CVP analysis be used in conjunction with other management accounting techniques?

A: Yes, CVP analysis can be used in conjunction with other management accounting techniques, such as activity-based costing and budgeting.

Q: What are some future research directions for CVP analysis with two products?

A: Some future research directions for CVP analysis with two products may include:

Developing more sophisticated models that take into account changes in sales mix and other factors that may affect profitability.
Investigating the use of CVP analysis in different industries and contexts.
Exploring the use of CVP analysis in conjunction with other management accounting techniques.