ACCA Applied Skills · Performance Management · Cost-volume-profit analysis (CVP)
A company produces and sells several products. Its CVP analysis uses a single weighted average contribution to sales ratio based on a budgeted sales mix. Which of the following is the most significant limitation of this approach?
The key limitation is that the break-even point depends on the assumed sales mix. If the actual mix differs from the budgeted mix, the weighted average contribution to sales ratio changes, so the calculated break-even revenue is no longer valid.
- AThe break-even point changes if the actual sales mix differs from the budgeted mixCorrect
- BThe analysis can only be used for products with no fixed costs
- CThe contribution to sales ratio cannot be calculated for more than one product
- DThe approach ignores the selling price of each product
Explanation
A weighted average contribution ratio depends on the assumed mix. If actual mix shifts towards products with lower contribution ratios, the average ratio falls and the true break-even revenue rises. The other statements are incorrect because multi-product ratios can be calculated, fixed costs are included, and prices are used in the ratio.
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