Description
You are an economist for the Vanda-Laye Corporation, which produces and distributes outdoor cooking supplies. The company has come under new ownership and management and will be undergoing changes in its product lines and operating structure. As an economist, your responsibilities include examining the market factors that affect success or failure of a product, including the supply and demand for the product, market conditions, and the behavior of competitors with similar products.
The new owners are evaluating the operating structure, and you have two possible alternatives. One alternative requires a high level of investment in fixed costs compared to the other alternative. Jorge, your supervisor, has assigned you the task of evaluating the two alternatives.
Assume that the company has no debt. Regardless of the alternative selected, market conditions will require the selling price of the product to be $3.45 per unit. The details for each alternative are given in the table.
Alternative 1
Alternative 2
Variable costs
$2.20
$2.70
Fixed costs
$80,000
$30,000
Total assets
$350,000
$350,000
Tasks:
Jorge has asked you to provide detailed responses to the following questions:
Analyze how the CVP analysis helps management in the planning stage of a new business.
What is the break-even quantity for each of the investment alternatives?
Analyze the breakeven differences between the two alternatives. What does the breakeven quantity tell you?
Which alternative would you recommend to the company? Explain the pros and cons of each alternative and the reasons for your selection.
Explanation & Answer
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Economics Question
Name
Course
Professor's Name
Date
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Analyze how the CVP analysis helps management in the planning stage of a new business
CVP (Cost-volume-Profit) is a decision-making approach that links the cost of
manufacturing or production to the earned profits from the production process. According to (Son,
2014), CVP is advantageous for managing a company entity during the planning phase since it
gives precise data that can be utilized to make well-informed decisions. The CVP analysis or
assessment is an object-oriented decision-making tool that provides insight into the new corporate
institution's future orientation. Using the CVP analysis is simple to examine all of the challenges
and uncertainties a company or organization may encounter in its early phases.
As a result, the manager will utilize CVP as an analytical tool to forecast future
expenditures and production for the firm's benefit. This will aid in preventing failure. CVP may
also give an overview of the activities occurring inside the organization or the business company.
This might include product and operational expenses (Hilsenrath, 2013). The cost-v...
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