1. Answer the following questions in essay format. 2. Your essay must include an
ID: 1151661 • Letter: 1
Question
1. Answer the following questions in essay format. 2. Your essay must include an introduction, body, and conclusion, and address all relevant parts of each question. Your response should be a minimum of 300 words in length. Make sure to cite any references you use. At a minimum, you must cite your textbook. Proper citation format for a reference includes the name of the author(s), the title of the work, the date of the publication, and the page number Cost-Volume-Profit Analysis Suppose you have decided to start a business producing and selling a product of your choice from the following options: custom birthday cakes, lawn mowers or sport jackets. For your essay, answer the following questions related to your product: Briefly describe the product you would produce and sell. What market will you target this product for? At what price would you sell your product? Make a projection of your sales in units for the first year of operations. . Make a detailed list of the materials needed to make your product. (Use the textbook and/or outside research as necessary.) How much in materials will you need for the year? What is the cost of these materials? Make a list of expenses you would incur in your business venture. (Use the textbook and/or outside research as necessary.) Examples include rent, utilities, insurance direct labor, manufacturing overhead costs and so on. Estimate the cost of each of these expenses per year. .Classify all of your expenses as either fixed or variable, and calculate how many units of your product you would need to sell to break even. How much operating income would you like to earn in the first year? Calculate how many units you would need to sell to meet your target profit. How realistic is your potential venture? Do you think your target profit is achievable? ExplainExplanation / Answer
Answer:
Essay on CVP Analysis;
Introduction:
Cost –Volume –Profit (CVP) Analysis as the name suggests is the analysis of the three variable viz: cost, volume and profit. Such analysis explores the relationship existing amongst costs, revenue, activity levels and the resulting profit. It aims at measuring variations of cost with volume.
In the profit planning of a business, Cost-Volume-Profit (C-V-P) relationship is the most significant factor.
It’s a technique for studying the relationship between cost volume and profit.
Profit of an undertaking depends upon a large number of factors. But the most important of these factors are the cost of manufacture, volume of sales and selling price of the products.
In the words of Herman C Heiser “ the most significant single factor in profit planning of the average business is the relationship between the volume of business , cost and profits”
CVP analysis the important tool used for profit planning in the business
Statement of Profit
Amount
Amount
Revenue /Sales
XXX
Less:
Variable costs of Production
Material
XXXX
Labour
XXXX
Direct Expenses
XXXX
Variable Overheads
XXXX
XXXX
Add:
Opening Stock of finished Goods ( at Marginal Coat)
XXXX
Less:
Closing Stock of finished Goods ( at Marginal Coat)
XXXX
Varaible Cost of goods sold
XXXX
Add:
Variable Selling Overhead
XXXX
Variable Cost of Sales
XXXX
Contribution
XXXX
Less:
All types of fixed Costs
XXXX
Commited Discretionary Costs
XXXX
Example
XYZ Cakes & Cookies Inc., a famous customs cake bakers' firm involved in production of Customs Cakes, Cookies and Pastries . Suppose that the XYZ Cakes & Cookies Inc. is involved in the production only customas cakes and it is expected to maintain same inventory at the end of the year as at the beginning of the year. Let us suppose the estimated fixed cost is $100, 000, and the estimated variable costs per unit are $14. Also assume that 60,000 cakes will be sold at price of $20 per unit . The maximum sales within the relevant range are 70,000 units. Calculate the following:
contribution margin ratio and unit contribution margin
break-even point in units.
margin of safety.
1. Contribution Margin Ratio
The contribution margin ratio is defined as the marginal profit per unit of sales. It helps the company in determining the profitability for the particular product. In the companies dealing with labor intensive tertiary sector have high intensive contribution margin ratio while the companies dealing in the capital intensive sectors have low intensive contribution margin ratio (Investopedia).
Contribution margin ratio = (product revenue - product variable cost)/product revenue
= (60,000*$20- 60,000*$14)/ (60,000*$14)
= ($360000/$120000)*100
0.3
So, contribution margin ratio for the firm is 30 percent.
Unit Contribution margin - it is value obtained when we subtract the selling price per unit with the unit variable cost.
i.e. Unit contribution margin = selling price per unit - variable coat per unit.
= $20 - $14
= $6
So the unit contribution margin for the firm in the production of molding is $6.
2. Break-even point in units
Break-even point is generally defined as the point at which gains equals the losses, so there is the condition of no profit no loss. In graphical terms, it is the point at which total revenues and total cost curves meet each other. It is also defined as the total fixed cost divided by the contribution margin per unit.
Break-even of sales in units = total fixed cost/ unit contribution margin
$100,000/$6
16,667 units
So break-even point in units of sales is 16,667 units i.e. company can reach break even when it will sell 16,667 units of cakes.
3. Break-even Analysis
It is the analysis to determine the break-even point i.e. the point at which revenue received equals to the cost associated with the receiving of the revenue. To calculate the break-even point we have first calculate the number of units, sales, total variable cost and total fixed cost (Investopedia).
We have assumed that the initial number of units is 10,000 and it is incremented by 10,000, after each iteration and time is in months
4. Margin of safety
The excess of a firm's expected sales in some future time over and above the breakeven point is called the margin of safety. Or in other words it represents the amount which corresponds to the drop in sales before the breakeven is reached.
The margin of safety is defined as the difference between the total revenue obtained from sales in the current year and the sales required to get break-even. It shows the possible increase in sales which may be occurred before an operating loss may occurs. If the margin of safety is low then even a small drop in sales may results in operating loss (Investopedia).
Margin of safety = (sales - sales at break-even) / sales
Calculation:
Expected sales = $60,000 * $20 = $12, 00,000
Sales at break-even point = break-even units * unit price
16,667 * $20
$3,33,340
Margin of Safety = Expected sales - sales at break-even units
$12, 00,000 - $3,33,340
$8,66,660
Margin of safety = (expected sales - sales at break-even units) / sales
$8,66,660/ $12, 00,000
0.7222
So, margin of safety for the XYZ Cakes & Cookies Inc. is 72.22 per cent.
Conclusion
The quantitative analysis can be defined as a technique that tries to interpret the behaviour of the business by using the composite or advanced mathematical or statistical modelling. Quantitative analysis is mostly used by business managers for decision making, attaining profitability and also to maximize the profits of the company. In the given case we have given in-depth analysis of cost-volume profit and also solved a case about the Wyatt Inc to gain more understanding of the concept. We have calculated the break-even, contribution margin and margin of safety for XYZ Cakes & Cookies Inc. The break-even units were 16,667 and margin of safety was 72.22 percent.
Reference Used:
Advanced Management Accounting Study Material
Institute of Chartered Accountants of India
Investopedia
Essay on CVP Analysis;
Introduction:
Cost –Volume –Profit (CVP) Analysis as the name suggests is the analysis of the three variable viz: cost, volume and profit. Such analysis explores the relationship existing amongst costs, revenue, activity levels and the resulting profit. It aims at measuring variations of cost with volume.
In the profit planning of a business, Cost-Volume-Profit (C-V-P) relationship is the most significant factor.
It’s a technique for studying the relationship between cost volume and profit.
Profit of an undertaking depends upon a large number of factors. But the most important of these factors are the cost of manufacture, volume of sales and selling price of the products.
In the words of Herman C Heiser “ the most significant single factor in profit planning of the average business is the relationship between the volume of business , cost and profits”
CVP analysis the important tool used for profit planning in the business
Statement of Profit
Amount
Amount
Revenue /Sales
XXX
Less:
Variable costs of Production
Material
XXXX
Labour
XXXX
Direct Expenses
XXXX
Variable Overheads
XXXX
XXXX
Add:
Opening Stock of finished Goods ( at Marginal Coat)
XXXX
Less:
Closing Stock of finished Goods ( at Marginal Coat)
XXXX
Varaible Cost of goods sold
XXXX
Add:
Variable Selling Overhead
XXXX
Variable Cost of Sales
XXXX
Contribution
XXXX
Less:
All types of fixed Costs
XXXX
Commited Discretionary Costs
XXXX
Example
XYZ Cakes & Cookies Inc., a famous customs cake bakers' firm involved in production of Customs Cakes, Cookies and Pastries . Suppose that the XYZ Cakes & Cookies Inc. is involved in the production only customas cakes and it is expected to maintain same inventory at the end of the year as at the beginning of the year. Let us suppose the estimated fixed cost is $100, 000, and the estimated variable costs per unit are $14. Also assume that 60,000 cakes will be sold at price of $20 per unit . The maximum sales within the relevant range are 70,000 units. Calculate the following:
contribution margin ratio and unit contribution margin
break-even point in units.
margin of safety.
1. Contribution Margin Ratio
The contribution margin ratio is defined as the marginal profit per unit of sales. It helps the company in determining the profitability for the particular product. In the companies dealing with labor intensive tertiary sector have high intensive contribution margin ratio while the companies dealing in the capital intensive sectors have low intensive contribution margin ratio (Investopedia).
Contribution margin ratio = (product revenue - product variable cost)/product revenue
= (60,000*$20- 60,000*$14)/ (60,000*$14)
= ($360000/$120000)*100
0.3
So, contribution margin ratio for the firm is 30 percent.
Unit Contribution margin - it is value obtained when we subtract the selling price per unit with the unit variable cost.
i.e. Unit contribution margin = selling price per unit - variable coat per unit.
= $20 - $14
= $6
So the unit contribution margin for the firm in the production of molding is $6.
2. Break-even point in units
Break-even point is generally defined as the point at which gains equals the losses, so there is the condition of no profit no loss. In graphical terms, it is the point at which total revenues and total cost curves meet each other. It is also defined as the total fixed cost divided by the contribution margin per unit.
Break-even of sales in units = total fixed cost/ unit contribution margin
$100,000/$6
16,667 units
So break-even point in units of sales is 16,667 units i.e. company can reach break even when it will sell 16,667 units of cakes.
3. Break-even Analysis
It is the analysis to determine the break-even point i.e. the point at which revenue received equals to the cost associated with the receiving of the revenue. To calculate the break-even point we have first calculate the number of units, sales, total variable cost and total fixed cost (Investopedia).
We have assumed that the initial number of units is 10,000 and it is incremented by 10,000, after each iteration and time is in months
4. Margin of safety
The excess of a firm's expected sales in some future time over and above the breakeven point is called the margin of safety. Or in other words it represents the amount which corresponds to the drop in sales before the breakeven is reached.
The margin of safety is defined as the difference between the total revenue obtained from sales in the current year and the sales required to get break-even. It shows the possible increase in sales which may be occurred before an operating loss may occurs. If the margin of safety is low then even a small drop in sales may results in operating loss (Investopedia).
Margin of safety = (sales - sales at break-even) / sales
Calculation:
Expected sales = $60,000 * $20 = $12, 00,000
Sales at break-even point = break-even units * unit price
16,667 * $20
$3,33,340
Margin of Safety = Expected sales - sales at break-even units
$12, 00,000 - $3,33,340
$8,66,660
Margin of safety = (expected sales - sales at break-even units) / sales
$8,66,660/ $12, 00,000
0.7222
So, margin of safety for the XYZ Cakes & Cookies Inc. is 72.22 per cent.
Conclusion
The quantitative analysis can be defined as a technique that tries to interpret the behaviour of the business by using the composite or advanced mathematical or statistical modelling. Quantitative analysis is mostly used by business managers for decision making, attaining profitability and also to maximize the profits of the company. In the given case we have given in-depth analysis of cost-volume profit and also solved a case about the Wyatt Inc to gain more understanding of the concept. We have calculated the break-even, contribution margin and margin of safety for XYZ Cakes & Cookies Inc. The break-even units were 16,667 and margin of safety was 72.22 percent.
Reference Used:
Advanced Management Accounting Study Material
Institute of Chartered Accountants of India
Investopedia
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