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    CVP Analysis

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    Deliverable Length: 200â?"300 words and 1 page showing calculations
    Details: Your CEO has limited knowledge of management accounting but of course, is vitally interested in forecasting profitability under different scenarios. He asked you, the management accountant, to begin your report by answering a few basic questions he's always wondered about. He has also given you some data to review and has asked you to report on the expected profitability under some given scenarios.

    Company Data

    Company's average selling price (SP) per unit = $20
    Product's variable cost per unit = $10
    Company's budgeted fixed costs for the upcoming year are expected to be $500,000
    You must complete the following:

    Write a report of 200â?"300 words including the following:
    What are two situations when the CEO would use CVP analysis?
    In simple terms,
    what is contribution margin?
    do managers want contribution margin to be a bigger or smaller figure? Why?
    What kind of firm needs to have a large contribution margin to be profitable: a firm with low or high SG&A expenses? Why?
    Give an example of such a firm.
    Include at least 1 page of calculations for the following scenario analyses:
    What is the break-even point, in units and dollars, for the basic data?
    The sales department thinks it could sell the product at a slightly higher price of $25/unit, but if the price is raised, it may lose 10% of sales volume in units.
    What would the expected profitability be if this higher selling price/unit in fact occurred?
    Based on this, should they raise the price? Why? Why not?
    As an alternative, increasing the sales price to $25/unit, the CEO is thinking of hiring a new VP of Marketing to ease his own workload at a total of $80,000 compensation and benefit cost.
    How much more volume, above the break-even unit volume determined earlier, would have to be sold to cover this additional cost?
    Obviously, the CEO does not want everyone to work hard just to break even. Using just to the original data given,
    what unit volume must be sold for the firm to earn $250,000 of profit?

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    Solution Preview

    What are two situations when the CEO would use CVP analysis?

    CVP analysis is cost volume profit analysis and analyses the impact on profits of a change in volume. It segregates all costs as either fixed or variable. Variable costs change with volume while the fixed costs are constant. Using this cost behavior, analysis is done. Two situations could be
    1. Setting up a stall in a fair - The rent would be fixed cost. We could analyze how many units would be sold to recover the rent to decide if the stall should be rented.
    2. Effect on additional advertising on profits. Advertising would be fixed cost and so we can calculate the additional sales that should be generated to cover the additional advertising expense.

    In simple terms,
    what is contribution margin?

    Contribution margin is defined as revenue less variable costs. It is called contribution margin since it contributes to covering the fixed costs and providing for profit. If contribution margin is greater than fixed costs, a firm would report operating profit.

    do managers want contribution margin to ...

    Solution Summary

    The solution explains some questions relating to CVP analysis