ACF2200 Lecture Notes - Lecture 10: Variable Cost, Contribution Margin, Sensitivity Analysis

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14 Aug 2018

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A te(cid:272)h(cid:374)i(cid:395)ue used to dete(cid:396)(cid:373)i(cid:374)e the effe(cid:272)ts of (cid:272)ha(cid:374)ges i(cid:374) a(cid:374) o(cid:396)ga(cid:374)isatio(cid:374)(cid:859)s sales volume on its costs, revenue and profit. Can provide answers to a series of short-term changes a quick tool to determine the impact on revenue and costs. Can be used in profit-seeking organisations and not-for-profit organisations. Cvp analysis provides information about: products or services to emphasise, sales needed to achieve target profit, revenue required to avoid losses, whether to increase fixed costs, budget for discretionary expenses, sensitivity analysis if costs change. The volume of sales where the total revenues and costs are equal, and the operation (cid:858)(cid:271)(cid:396)eaks eve(cid:374)(cid:859) At this level of sales, there is no profit or loss. The break-even point can be calculated for an entire organisation or for individual projects or activities. Unit contribution margin: the difference between the sales price per unit and the variable cost per unit.

Related Questions

SHORT QUESTIONS. PLEASE ANSWER ALL OF THEM (IN 3 TO 4LINES EACH) to get positive rating.

What is the importance of understanding the general economicenvironment and the industry situations in financial statementsanalysis?

Distinguish between horizontal and vertical analysis offinancial statement data.

What is the importance of using industry or competitor data infinancial statement analysis?

If net sales have been increasing at a reasonable rate, but netincome has been declining steadily as a percentage of these sales,what appears to be the problem?

What is cost-volume-profit analysis? What are the assumptionsand limitations of cost volume profit analysis? How can thebreakeven and cost-volume-profit analysis help the companyâsmanagement in carrying out its function?

Explain the significance of the margin of safety?

How is the high-low method used in segregating the fixed andvariable components of mixed costs?

How will the breakeven point for multiple product line becomputed?

What is a composite contribution margin?

Overview: Classifying a companyâs costs allows for an in-depthanalysis of the impact that changes in output have on revenues,costs, and net income or net loss. A cost-volume-profit (CVP)analysis will be completed in order to determine the breakevenpoint. Relevant costs will be used to prepare a flexible budget.Additionally, an appropriate costing system should be selected andthe choice should be substantiated with reasonable rationale.Finally, a memo should be prepared for management that summarizesthe results of the quantitative analysis and makes recommendationsfor an optimal costing system to be ethically used by key decisionmakers. For Milestone One, you will use the MDE ManufacturingBudget (Table I) to analyze costs, contribution margin, andbreakeven point for the bird feeder division of the company. In Tab1 of your Student Workbook, classify costs as either product orperiod costs. Briefly explain the difference between the types ofcosts. Then, analyze the actual costs and, using Tab 2 of yourStudent Workbook, complete a cost-volume-profit analysis todetermine how many bird feeders must be sold at the current costand sales price level to earn a 10% profit and how much the salesprice would have to increase to earn a 10% profit at the same costand sales volume level. Submit the Student Workbook with Tabs 1 and2 completed with your cost calculations and a 1â2 page Worddocument that explains the implications of your findings andaddresses all of the critical elements in Section I.

I. Salesand Manufacturing Expenses: Budget and Actual (2014)

You will use this table to complete Milestones One and Two.

	Budget ($)	Actual ($)

Sales	1,050,000	991,700

Expenses
Materials â Cedar	225,000	248,160
Materials â Plastic	37,500	37,741
Factory Worker Labor	300,000	332,760
Materials â Indirect	3,000	2,585
Factory Depreciation	78,000	78,000
Factory Utilities	12,000	12,000
Factory Maintenance and Repairs	5,000	4,500
Shipping ($2.25/each)	112,500	105,750
Sales Commissions ($2.00/unitsold)	100,000	94,000
Office Rent	12,000	12,000
Advertising	20,000	20,000
Liability insurance	5,000	5,000
Office Depreciation	1,000	1,000
Office Salaries	48,000	48,000

Total Expenses	959,000	1,001,496

II. Contribution Margin: Static Budget and Actual Results (2014)

You will use this table to complete Milestone Two.

	Actual Results	Static Budget Amount

Units Sold	47,000	50,000
Revenues ($)	991,700	1,050,000
Manufacturing Costs ($)
Variable	621,246	565,500
Fixed	94,500	95,000
Gross Margin	275,954	389,500

Milestone One,Part I




	Product Costs









	Period Costs





		Totals	Totals
		Budget	Actual
Sales Price per Unit

Variable Costs
	Materials - Cedar
	Materials - Plastic
	Factory Worker Labor
	Materials - Indirect
	Shipping ($2.25/ea)
	Sales Commissions ($2/unit sold)

Variable Cost per Unit

Contribution Margin


Fixed Costs
	Factory Depreciation
	Factory Utilities
	Factory Maintenance and Repairs
	Office Rent
	Advertising
	Liability Insurance
	Office Depreciation
	Office Salaries
Total Fixed Costs


Using Budgeted Amounts
Breakeven Point -				Breakeven Point -


Using Actual Amounts				Units at Current Sales Price
+ 10,000 profit

Using actual amounts				New Contribution Margin
+ 10,000 profit				Current Variable Costs
				New Sales Price

ceruleanwombat580

Contribution Margin Analysis:

We calculatecontribution margin by taking our sales revenue less our variablecosts. This basically tells us the portion of our sales that areavailable to cover the fixed cost of the business.

Contribution marginper unit is especially useful. We compute this by taking our salesrevenues per unit less our variable cost per unit. With this, wecan easily compute our break-even point.

Dog Day Care

Pricing at $18 per dog per day, you can expect to have 22 dogsper day

Pricing at $20 per dog per day, you can expect to have 15 dogsper day

Pricing at $25 per dog per day, you can expect to have 10 dogsper day

Â· Overnight Boarding

Pricing at $25 per dog per day, you can expect to have 12 dogsper day

Pricing at $28 per dog per day, you can expect to have 10 dogsper day

Pricing at $430 per dog per day, you can expect to have 7 dogsper day

Basic Groom

Pricing at $25 per dog per day, you can expect to have 5 dogsper day

Pricing at $30 per dog per day, you can expect to have 4 dogsper day

Pricing at $35 per dog per day, you can expect to have 3 dogsper day

Break-Even Analysis:

Break-even analysis isa key element of cost-volume-profit analysis. The technique ishelpful for new and small businesses to assess the viability oftheir start-up. However, it can also be quite beneficial forestablished businesses when evaluating new and existing productlines.

In this exercise, weare computing not only the break-even point but also the number ofunits that must be sold in order to earn given levels of targetprofit.

The break-even formulais:

Fixed Costs /Contribution Margin per Unit

The formula to computethe level required for a target profit is:

(Fixed Costs + TargetProfit) / Contribution Margin per Unit

We have alreadycomputed fixed costs for each area in our Milestone One. We will beusing these figures as follows:

Grooming, fixed costs:2,367.92

Daycare, fixed costs:859.39

Boarding, fixed costs:1,378.99

Our computations wouldthen be as follows:

Grooming

Sales Price $25

Break-even: 158

$1,000 Profit: 225

$1,500 Profit: 258

Sales Price $30

Break-even: 119

$1,000 Profit: 169

$1,500 Profit: 194

Sales Price $35

Break-even: 95

$1,000 Profit: 135

$1,500 Profit: 155

Daycare

Sales Price $18

Break-even: 65

$417 Profit: 97

$667 Profit: 116

Sales Price $20

Break-even: 57

$417 Profit: 84

$667 Profit: 101

Sales Price $25

Break-even: 43

$417 Profit: 64

$667 Profit: 76

Boarding

Sales Price $25

Break-even: 79

$583 Profit: 112

$909 Profit: 130

Sales Price $28

Break-even: 67

$583 Profit: 96

$909 Profit: 111

Sales Price $30

Break-even: 61

$583 Profit: 87

$909 Profit: 102

Break-EvenAnalysis

Instructions - Showall steps and calculations to determine the break-even, as well asthe break-even for the target profit levels as outlined in theinstructions. Round all decimals UP to next wholenumber

ACF2200 Lecture Notes - Lecture 10: Variable Cost, Contribution Margin, Sensitivity Analysis

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