Cost-Volume-Profit Analysis

User Generated

tvfryy07

Business Finance

Description

Purpose of Assignment

The Case Study focuses on CVP (Cost-Volume-Profit), break-even, and margin of safety analyses which allows students to experience working through a business scenario and applying these tools in managerial decision making.

Assignment Steps

Resources: Generally Accepted Accounting Principles (GAAP), U.S. Securities and Exchange Commission (SEC)

Tutorial help on Excel® and Word functions can be found on the Microsoft® Office website. There are also additional tutorials via the web offering support for Office products.

Scenario: Mary Willis is the advertising manager for Bargain Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased display space that will add $24,000 in fixed costs to the $270,000 in fixed costs currently spent. In addition, Mary is proposing a 5% price decrease ($40 to $38) will produce a 20% increase in sales volume (20,000 to 24,000). Variable costs will remain at $24 per pair of shoes. Management is impressed with Mary's ideas but concerned about the effects these changes will have on the break-even point and the margin of safety.

Complete the following:

  • Compute the current break-even point in units, and compare it to the break-even point in units if Mary's ideas are used.
  • Compute the margin of safety ratio for current operations and after Mary's changes are introduced (Round to nearest full percent).
  • Prepare a CVP (Cost-Volume-Profit) income statement for current operations and after Mary's changes are introduced.

Prepare a maximum 700-word informal memo to management addressing Mary's suggested changes.

  • Explain whether Mary's changes should be adopted. Why or why not? Analyze the above information (three bullet points above) and use this information to support your suggestion.

Show your work in Microsoft® Word or Excel®.

Complete calculations/computations using Microsoft® Word or Excel®.

Format your assignment consistent with APA guidelines.

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Explanation & Answer

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Unit Selling price
Less Variable costs
Unit contribution
Break-even point
Break-even point = Fixed costs/ Unit contribution
Current break-even point
New break-even point
Margin of safety ratio
Margin of safety ratio = (Total sales - Break even sales)/ Total sales
Current margin of safety ratio
New margin of safety ratio
CVP income statement
CVP Income Statement
Sales
Variable expenses
Contribution margin
Fixed expenses
Net Income/ Loss

Current New
40
24
16

38
24
14

16875
21000

16%
13%

Current New
800000 912000
480000 576000
320000 336000
270000 294000
50000
42000


Running head: Cost-Volume-Profit Analysis

1

Cost-Volume-Pr...


Anonymous
Excellent resource! Really helped me get the gist of things.

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