American International Journal of Contemporary Research Vol. 2 No.

5; May 2012
Removing the Constraining Assumption of No Joint Products in Breakeven Analysis
Enyi Patrick Enyi
Babcock Business School
Babcock University, Ilishan-Remo
Ogun State, Nigeria.
Abstract
ne of the ma!or assumptions of the "rea#$e%en concept is that there is only one pro&uct line. 'his assumption
thou(h) has helpe& in perfectin( the e*istin( mathematical mo&el for fin&in( the "rea#e%en point of a firm an& for
analy+in( the implications of a firm,s acti%ity le%el on its costs an& profits) has seriously re&uce& an& hin&ere&
consi&era"ly the use of the concept in analy+in( the economic implications of %olume in a multi$pro&uct "usiness
or(ani+ation of to&ay,s competiti%e "usiness en%ironment. 'he nee& to re%erse this tren& prompte& the researcher
to usin( the Re%erse& Contri"ution to -ales Ratio .RC-R/ approach to perfect a ne0 formula for analy+in( multi
pro&ucts "rea#$e%en points. 'his paper uses a fairly$easy$to$un&erstan& approach to present the ne0 mo&el. 'he
test result usin( the pro&uct moment correlation coefficient re%eale& a perfect in%erse relationship "et0een the
normal Contri"ution to -ales Ratio .C-R/ an& the associate& RC-R for in&i%i&ual pro&ucts thus pro%in( that the
ne0 mo&el 0as hi(hly effecti%e an& precise in the allocation of the !oint$pro&ucts "rea#$e%en sales to the
in&i%i&ual mem"er pro&ucts. 'he implication of this &e%elopment is that the assumption of 1only one product
line no lon(er hol& in "rea#e%en analysis an& hence) recommen&e& for pe&a(o(ical purposes.
Introduction
It is not, often that you see a manufacturing or trading firm dealing ith only one !roduct line in modern times.
"his may be so in earlier business ages hen com!etition is minimal and com!etitors are fe. #odern day
business re$uires the s!irit of com!etitiveness hich a single !roduct line can no longer satisfy.
In trying to fit into a com!etitive orld, a business has to decide hich of its o!erating costs are relevant and
hich are not. %ortunately, accounting theorists of the !ast earlier came u! ith the conce!t of marginal costing
&fashioned after the economy theory of marginal cost and marginal revenue' and there conse$uent break-even
!oint theory and analysis. (oing by the economists custom of holding other things constant hile dealing ith a
!articular variable as in their !enchant use of the !hrase ceteris paribus, the break even analysis is su!!osed to
deal ith only one !roduct line as !ortrayed by the assum!tion that) there is only on product line &-amuelson)
1230'. "his assum!tion, though, has been used successfully over the years to aid the analysis of o!erational
budgets and short term decision making !rocesses, has seriously limited the use of the break-even analysis in
!roviding solutions to short term decision making !roblems in our !resent economic orld of multi-!roduct
businesses. "he idea for this !a!er arose from the need to offer a better model that can deal holistically ith
break-even analysis in order to ade$uately address the !roblem associated ith *oint or multi-!roducts es!ecially
during o!erational budget !re!arations.
Multi Products Break!Even Point
"o calculate the normal break-even !oint all that is re$uired are)
&+' "he se!aration of fi,ed and variable costs from estimated total costs.
&-' "he estimate of the total out!ut ca!acity
&.' "he variable cost !er unit
&/' "he selling !rice !er unit0 and
&1' "he total estimated fi,ed costs
"his means that you can determine the single !roduct break-even !oint in units or in 2ollar sales using either)
b+ 3 f4c &+'
for break-even
$ty.
b
-
3 !f4c &-'
for break-even
sales
5here
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Centre for 4romotin( I&eas) 5-A 000.ai!crnet.com
b
+
3 break even-!oint in units
b
-
3 break-even !oint in 2ollar
Sales f 3 total fi,ed costs
c 3 ! - v 3 contribution !er unit
! 3 Unit Selling 7rice
v 3 Unit 8ariable cost
Or, break-even !oint can e$ually be determined using the 9ost, 8olume, 7rofit &987' charts &2rury, -66.0
:orngren, +;<-0 =ucy, +;;;'. But for no this can only ha!!en for a single !roduct or overall firm>s *oint
!roducts breakeven !oint. Until no it is only !ossible to find a single *oint or multi!le !roducts break-even
!oint0 the !roblem of finding the break-even !oint for the individual !roduct members of the *oint grou! becomes
another challenge hich the e,isting model has been unable to meet. ? recent mathematical e,!eriment by the
author of this !a!er offered a solution to this age long !roblem using a Reversed Contribution to Sales Ratio
&RC"R' a!!roach blended ith a !erfected algebraic inter!olation formula.
"he reversed contribution to sales ratio is a figure derived from an attem!t to fashion out a *oint !roducts
breakeven !oint sharing ratio beteen the individual !roducts making u! the grou! using the inverse value of
each !roduct>s normal contribution to sales ratio &9SR'.
"he ne model orks by first analy@ing the budgeted o!erations data into)
&+' 'otal 6u&(ete& -ales &"urnover Astimate'0
&-' 'otal 6u&(ete& profit;
&.' 'otal fi*e& Costs0
&/' Contri"ution per pro&uct per unit &this can be easily derived from subtracting the unit variable cost !er
!roduct from the unit selling !rice) p - v as defined earlier'0 and
&1' Contri"ution to sales ratio - using the total sales !er !roduct to divide the total contribution !er !roduct
line &Omolehina, +;;+'.
5ith the above data ready, e can no !roceed to make the attendant theoretical assum!tions and derive the ne
mathematical model as follos)
=et c 3 total contribution
3 original contribution to Sales Ratio &9SR' i.e. 3 contribution 4
sales
d 3 !ro!ortional 9SR
e 3 reverse value
y 3 Reversed 9ontribution to Sales Ratio &R9SR'
such that)
d
t
3 +66 #
t
$ % &.'
e
t
3 +66 - d
t &/'
y
t
3 +66 #e
t
$ % &1'
here)
c 3 contribution !er !roduct
n 3 number of !roducts
t 3 n
th
!roduct
9arrying our assum!tions further,
=et b 3 Boint !roducts BA7 in 2ollar Sales
s 3 "otal sales &all !roducts'
f 3 total fi,ed
costs
Such that)
b 3 fs4c &C'
b
!t
3 &y
t
b'4+66 &D'
5here
b
!t
3individual break-even sales for the t !roduct
&he proof of the pudding
"o see ho the model orks, e shall use the folloing case data to do the analysis)
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American International Journal of Contemporary Research Vol. 2 No. 5; May 2012
Malaika 'td is engaged in the manufacture and sale of 1 !roducts namely ?, B, 9, 2, and A. "he folloing data
relate to its !ro!osed budget for the first $uarter of -6+-)
&+' "otal fi,ed costs estimate 3 E+/<,666
&-' Other o!erational data are tabulated as follos)
&able () Malaika 'td*s +perational Budget ,ata -irst .uarter /0(/
7roduct Sales 8ariable 9osts US7 U89
? -16,666 -66,666 -1 -6
B 1+6,666 /16,666 ./ .6
9 1C6,666 //6,666 -< --
2 -<6,666 -16,666 -< -1
A -/6,666 +<6,666 -6 +1
Required - ?naly@e the given data above ith a vie to !resenting)
&+' "he over-all break-even !oint in 2ollar sales for the firm0 and
&-' "he individual !roducts breakeven !oint -
&+' In 2ollar sales
&-' In units
&.' "he over-all margin of safety and the individual !roducts margin of safety
Solution
"he re$uired ste!s in solving this !roblem are to do an e,tended analysis of the data in a tabular format using the
formulae earlier derived as in table - belo. "he !rimary !rocedure is)
Step 1 F 9om!ute the overall contribution for the firm0
Step 2 F 9om!ute the contribution !er !roduct line
Step 3 F 9om!ute the 9ontribution to Sales Ratio &9SR'
Step 4 F 9om!ute the !ro!ortional 9SR using the formula as !er e$uation
&.' Step 5 F 9om!ute the Reverse 8alue &R8' of the 9SR using e$uation &/'
Step 6 F 9om!ute the Reversed 9ontribution to Sales Ratio &R9SR' using e$uation &1' formula.
Step F 9om!ute the *oint !roducts breakeven !oint in 2ollar sales using e$uation &C' formula.
Step ! F ?!!ortion the *oint !roducts breakeven !oint in 2ollar sales com!uted in ste! D to the individual !roduct
line using the formula in e$uation &D'.
Step " F 2ivide the value com!uted in ste! < by the !roduct unit selling !rice &US7' to get the breakeven !oint in
$uantity of !roducts.
Note) ?ll the nine ste!s above can easily be !resented ith the use a table as hen doing a statistical analysis.
"able - belo ca!tured all the calculations from ste! + to ste! C. Ste!s D to ; are !resented on table ..
&able /) Computation -ormat for Reversed Contribution$"ales Ratio #RC"R%
Product "ales 1ariable Contribution C"R PC"R R1 RC"R
Costs &2' &d' &e' &y'
? -16,666 -66,666 16,666 -6.6 --.1 DD.1 +;./
B 1+6,666 /16,666 C6,666 ++.DC +..- <C.< -+.D
9 1C6,666 //6,666 +-6,666 -+./. -/.+ D1.; +;.6
2 -<6,666 -16,666 .6,666 +6.D+ +-.6 <<.6 --.6
A -/6,666 +<6,666 C6,666 -1.6 -<.- D+.< +D.;
&otal #3% (45604000 (47/04000 8/04000 559: (0090 60090 (0090
:aving obtained the values of y as in the above table, e no calculate the *oint !roducts break-even sale in
2ollar as follos)
b 3 &+/<,666 , +,</6,666' $ .-6,666
3 <1+, 666 in 2ollar sales
"o a!!ortion this figure to the *oint !roducts on individual !roducts basis, e use the value of y from the above
table)
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&able 8) Computation of ;ndividual Product*s Breakeven Points
7roduc
t y 8alue Boint BA7 7roduct BA7 7roduct US7 BA7 in units
&g' &h' &i' &*' &k'
&derived' &derived' &gh4+66' &given' &i4*'
? +;./ <1+,666 +C1,6;/ -1 C,C6/
B -+.D <1+,666 +</,CCD ./ 1,/.-
9 +;.6 <1+,666 +C+,C;6 -< 1,DD1
2 --.6 <1+,666 +<D,--6 -< C,C<D
A +D.; <1+,666 +1-,.-; -6 D,C+D
Margin of "afety on BEP Analysis
"he margin of safety is the distance beteen the breakeven !oint and the budgeted achievable ca!acity. It may be
re!resented in 2ollar of sales, units of sales or in !ercentage of the budgeted out!ut. "he margin of safety
measures the e,tent to hich a !roduct>s comfort @one can be stretched before the budgeted estimate is e,hausted.
&able 6) Computation of Margin of "afety
7roduct Sales
BA
7 #OS
G of
#OS
Boint +,</6,666 <1+,666 ;<;,666 1..D1G
? -16,666 +C1,6;/ </,;6C ...;CG
B 1+6,666 +</,CCD .-1,... C..D;G
9 1C6,666 +C+,C;6 .;<,.+6 D+.+.G
2 -<6,666 +<D,--6 ;-,D<6 ...+/G
A -/6,666 +1-,.-;
<D,CD
+ .C.1.G
Comparative &ests
"hough, the knoledge of the margin of safety on each !roduct is a useful guide, e are more interested on ho
the individual !roduct>s breakeven !oint relates to the overall budgeted sales figures. "his can be done by dividing
each !roducts breakeven !oint in 2ollar sales by the total budgeted sales as e have done in table 1 belo)
&able 7) Computation of Ratio of Product BEP to &otal "ales
7roduct Sales
BA
7 G of BA7
Boint +,</6,666 <1+,666 /C.-1G
? -16,666 +C1,6;/ <.;DG
B 1+6,666 +</,CCD +6.6/G
9 1C6,666 +C+,C;6 <.D;G
2 -<6,666 +<D,--6 +6.+DG
A -/6,666 +1-,.-; <.-<G
7lease note that the *oint ratio of /C.-1G is also e$ual to the summation of the individual !roducts> ratios.
"o find a sufficient measure of association, e com!are the original !roducts 9SR ith the !ercentages derived
above on one hand and the R9SR on the other hand using the !roduct moment coefficient correlation formula and
the multi!le regression analysis as shon belo)
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D
American International Journal of Contemporary Research
Vol. 2 No. 5; May
2012
&able <) Multiple 1ariables Regression Analysis
7roduct BA74Sales Ratio 7roduct 9SR Reversed 9SR
? <.;D -6 +;./
B +6.6/ ++.DC -+.D
9 <.D; -+./. +;
2 +6.+D +6.D+ --
A <.-< -1 +D.;
Regression =ine H I 3 6.+<1</a F 6>66+;<,
+
J 6./1/;D,
-
R
/
3 6.;;;;<+;C
Boint 9orrelation 9oefficient 3 6.;;;;;;6;<
"AS" O% SI(NI%I9?N9A O% R
/
9alculated % &to-tailed test' 3 11/-C.CD/6C..D
9alculated % &one-tailed test' 3 ++6<1.../<+-CD/
&able =) Correlation Coefficient Analysis #BEP Ratio and Product C"R%
7roduct BA7-Ratio
9S
R
? <.;D
-
6
B +6.6/
++.
DC
9 <.D;
-+.
/.
2 +6.+D
+6.
D+
A <.-< -1
"he 9oefficient of 9orrelation is) !(900
"his coefficient indicates that there is #er$ect %e&ative correlation beteen the individual !roduct>s breakeven
!oint ratios and the normal 9ontribution to Sales ratios of the individual !roducts.
&able 5) Correlation Coefficient Analysis #BEP Ratio and Reversed C"R%
7roduct BA7-Ratio
R9
SR
? <.;D
+;.
/
B +6.6/
-+.
D
9 <.D; +;
2 +6.+D --
A <.-<
+D.
;
"he 9oefficient of 9orrelation is) (900
"his coefficient indicates that there is #er$ect #ositive correlation beteen the individual !roduct>s breakeven
!oint ratios and the normal 9ontribution to Sales ratios of the individual !roducts.
,iscussions
"he tabulation in table . shos the individual !roduct break-even !oint both in 2ollar sales as ell as in $uantity.
5e observed from the $uestion that no information is given about ho the fi,ed costs relate to the individual
!roducts. :oever, given the relationshi! that e have been able to establish, it is easy to !ro-rate the fi,ed cost
using the com!uted break-even !oints.
One may ant to ask here 'hy use the reverse CSR approach(
"o anser this $uestion, e shall first of all look at ho break-even !oint is determined ordinarily. It is evident
from the solutions given to many cases of single !roduct 987 analysis that the sli))er the contribution )ar&in,
the hi&her the brea*+even point and vice versa. "his sim!ly means that you re$uire larger volume of activity to
be able to recover total cost hen your !roduct>s contribution margin is slim than hen it is ithin comfortable
level. #any high com!etitive !roducts are noted for having slim contribution margin oing to the fear of !ricing
one>s !roducts out of the market. But !roducts in a mono!olistic or oligo!olistic market &from e,!erience' usually
carry high contribution margin.
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Centre for 4romotin( I&eas) 5-A 000.ai!crnet.com
Relating the above analogy to the use of the reverse 9SR in com!uting individual !roduct>s BA7 in a multi-
!roduct setting !oints to the fact that those products 'ith lo'er contribution )ar&in )ust have contributed
)ore to the derived ,oint brea*+even position for the com!any than those that have higher margins &#oore, +;;<0
#orse K Limmerman, +;;D0 Solomon, -66+'. ?s a result, the effect of the contribution margin for each !roduct
ill be inversely !ro!ortional to the over-all &*oint' break-even !oint in relation to the original contribution to
sales ratio. Oing to the fact that this !osition has never been considered in the !ast it became almost im!ossible
to ascertain individual !roduct>s break-even !oint using a com!uted *oint or multi-!roducts break-even !oint.
=ooking at the statistical test of significance of the breakeven !oints com!uted using the model, it ill seem
obvious that a !erfect solution to the *oint !roducts breakeven analysis has been found. 5ith a !erfectly negative
correlation co-efficient of -+, it is evident that the com!uted break-even !oint relate !erfectly to the individual
!roducts BA7 using the *oint BA7 figure as a base. %rom a test of multi-variable regression analysis using the
com!uted individual !roduct>s breakeven to sales ratio as the de!endent variable and the 9SR and the R9SR as
the inde!endent variables, it is evident from the coefficient of multi!le determination &R
-
' of 6.;;;;<+;C and the
high - ratio that the 9SR and the R9SR are to sides of the same coin &:illier K =ieberman, -66D'. "hat being
the case, there is no gain saying the fact that R9SR is the true key to the determination of individual !roduct>s
breakeven !oint in a multi-!roduct breakeven analysis scenario.
Conclusion $Recommendation
:aving !erused through many analytical considerations of the break-even conce!t, it is !ertinent that a modern
and more scientific a!!roach be ado!ted in unknotting thorny issues found in sim!le theories that a!!arently
a!!ear to be !reviously unsolvable. "he Reversed 9ontribution to Sales Ratio &R9SR' a!!roach introduced and
ado!ted in this !a!er is a milestone in resolving one of such log*am in break-even analysis. 5ith this method, the
assum!tion of Monly one sin&le products lineN no longer holds and should therefore, be e,!unged from the break-
even analysis assum!tions.
Re$erences
2rury, 9. &-66.', MANA78M8N' AN9 C-' ACC5N'IN7, =ondon) "homson =earning Books.
:orngren, 9. ". &+;<-', C-' ACC5N'IN7 : A Mana(erial 8mphasis, Angleood 9liffs) 7rentice :all
International
:illier, %. S. K (. B. =ieberman, &-66D', IN'R95C'IN ' 48RA'IN- R8-8ARC;, D
th
Adition, Ne
2elhi) "ata #c(ra-:ill
=ucey, ". &+;;;', MANA78M8N' ACC5N'IN7, &.
R2
edn', =ondon) A=S"
#oore, ". &+;;<', ';8 ANA'M< = 98CI-IN-, %lorida, US?) Brace 9ollege 7ublishers
#orse, 2.9. K Limmerman, B.=. &+;;D', MANA78RIA> ACC5N'IN7, Boston #?, Irin #c(ra :ill
Omolehina, O. A. &+;;+', C4IN7 ?I'; C-' ACC5N'IN7, =agos) 2un #ark 7ublishers
Samuelson, 7. ?. &+;<6', 8CNMIC-, "okyo) #c(ra :ill
Solomon, 7. &-66+', IN=RMA'IN =R 98CI-IN MA@IN7, Bang!ura, India) 8ikas 7ublishing :ouse
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