Joint Products CVP Analysis – Time for Methodical Review

descriptionPublicationkeyboard_double_arrow_right Article , Other literature type 30 Dec 2019Publisher:Asian Institute of ResearchJournal:Journal of Economics and Business, volume 2 (eissn: 2615-3726,

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Authors: Enyi Patrick Enyi;

doi: 10.31014/aior.1992.02.04.168 , 10.6084/m9.figshare.11301626 , 10.6084/m9.figshare.11301626.v1

Joint Products CVP Analysis – Time for Methodical Review

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Abstract

This paper compares the effectiveness of the Weighted-Contribution-Margin (WCM) and the Reversed-Contribution-Margin-Ratio (RCMR) in multiproduct Cost-Volume-Profit analysis applications. Using a rehashed-activity data and the OLS regression to analyse six joint-products over 42 weeks operation, it was found that the WCM lacks analytical efficiency and generates suboptimal products mix because it ignores the inverse relationship between a product’s contribution-margin-ratio (CMR) and its breakeven point (BEP). These deficiencies present potential resource allocation problems during periods of low capacity utilization periods. The paper recommends the use of the RCMR which factors the tradeoff effects of the CMR/BEP in its measurement.

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Keywords

Contribution Margin Ratio, Weighted Contribution Margin Ratio, Reversed Contribution Margin Ratio, Breakeven Point, Cost-Volume-Profit Analysis

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