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Full Cost: PVC Calculations

1. Why does multiple product cost-volume-profit analysis often assume a constant product mix?
2. A manager in your organization just received a special order at a price that is "below cost." The manager points to the document and says, "These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the business. If we sell below our full cost, we'll be out of business in no time." What do you think of this remark?

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1. Multiple product cost volume profit analysis often assumes a constant product mix. When a constant product mix is assumed the contribution margin is the weighted average contribution margin for all of its products. The company assumes that the unit contribution is the excess of the unit price over the unit variable cost. A constant product mix is assumed because it allows cost volume profit calculations to be performed using combined unit or revenue data for the organization as a ...

Solution Summary

The answer to this problem explains why a fixed product mix is assumed in PVC calculations. The references related to the answer are also included.