Removing the Constraining Assumption of No Joint Products in Breakeven Analysis
20 Pages Posted: 9 Feb 2012 Last revised: 25 Feb 2012
Date Written: February 7, 2012
A major constraining assumption of the break-even concept is that there is only one product line. Though, this assisted greatly in perfecting the normal breakeven analysis model; it, however, prevented the use of the concept in analyzing multi-product breakeven points. Earlier attempts to address this theoretical hitch used the weighted Contribution Margin Ratio (CMR) approach which has the propensity to over-allocate. This paper uses the Reversed Contribution Margin Ratio (RCMR) approach to perfect a new model for apportioning the joint-products break-even point to the constituent product lines. The associated statistical correlation test revealed a perfect inverse relationship between the normal CMR and the resulting RCMR for the individual products thus proving the linearity and precision of the new model. The implication of this development is that the assumption of ‘only one product line’ no longer holds in breakeven analysis and hence, recommended to be expunged for pedagogical purposes.
Keywords: Breakeven, CVP, Joint-Products, Chart, Profit, Volume, Cost, Ratio
JEL Classification: D57, D61, E37, M21, M41
Suggested Citation: Suggested Citation