Joint Products CVP Analysis – Time for Methodical Review

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.