Important Points Regarding
In Figure, there are two cost lines to show, which is designed to reveal the change due to the selling price has only one sales line (45°). The impact of change in the sales price is reflected indirectly in the variable cost which is line and is represented by the cost line. Thus, due to the fact that an essential input for drawing the chart gets selling price is changed. In other words. The new V/V ratio has been determined as follows.
(i) When there is an increase in selling price by 25 percent.
(ii) When there is a decrease in sales price by 25 per cent
Sales price = Rs 7.50 (Rs 10 – Rs 2.50) or 75 per cent (Rs 7.5 per unit)
Variable costs = Rs 5 or 50 per cent (existing)
V/V Ratio = (Rs 5 + Rs 7.50) or (50 + 75) or 66.67 per cent
Total cost line = Rs 60,000 + 66.67 per cent sales
Since the V/V ratio assumes a fractional form, care has been taken to plot points at sales levels of Rs 1,50,000 and Rs 2,40,000 so that corresponding variable cost figures can be whole numbers, that is Rs 1,00,000 and Rs 1,60,000 respectively.
Figure portrays VCP relationships of a sales-mix for multi-product firm. The steps regarding the plotting of a sales line and fixed cost line are identical with those of a simple VCP graph concerning one product. An additional step pertains to the drawing of a variable
cost line. For the purpose, the required input is the weighted average variable cost. In Example, it is 73 per cent (in an original sales mix of 5:3:2 for products X, Y and Z respectively). The figure 73 per cent is arrived at by deducting (weighted P/V ratio from 100 (100 per cent 27 per cent. P/V ratio). For the revised sales-mix, it is 70 per cent (100 per cent-30 per cent).
However, the composite VCP graph is inadequate, it does not enable the management to know product wise BEPs and profits. One way to overcome this difficulty is to have individual break even analysis charts for each product.