# Cost volume profit analysis

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Cost volume profit analysis:

Kee (2007) provides that cost volume profit analysis shows the relationship between a product's revenue and cost functions and is used to examine financial implications as a result of various strategic and operational decisions. Phillips (1994) also states that cost volume profit analysis is an important tool in evaluating various circumstances such as carrying out break even analysis, determining marketing mix and evaluating pricing strategy. Cost volume profit analysis can be used in measuring a product's profit response to variations in one or more of its underlying parameters (Kee, 2007). CVP analysis is termed as a simple and helpful tool in making decisions relating to strategies and long run objectives.

Since turnover is represented by sale price multiplied by number of units then sales turnover increases with high sales volume and vice versa and also total cost increase with high sales volume. Since the tool relates to cost, volume and profit the formula is provided as follows; NP = Px - (a + bx) where NP is the net profit, P is selling price, x is units sold, a is fixed cost and b is variable cost per unit. We can use cost volume profit analysis to determine product price or cost required in order to attain set out profit levels.

2012:

The strategy for this year after carrying out cost volume profit analysis involved setting tablet price and research and development cost at desired levels. The strategy for tablet X5 involved pricing the product at $ 265 while allocation for research and development cost accounted for 33%. In tablet X6 the price was determined to be $ 420 while research and development allocation was 44%. Tablet X7 was priced at $ 190 and R&D allocation was 23%.

The strategy used for 2012 resulted in tablet X5 increasing total profit from $ 104,988,835 in 2011 to $ 143,922,711 in 2012 which and profitability increased from 26% to 29%. Revenue generated from sales, sales volume, and variable costs increased by a similar margin of 21% over the period. Research and development cost did not change in 2012. First time ...

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This posting looks into Cost volume profit analysis. Specifically, it looks into Time Warps which are used as measures within which this is solved.

Cost-Volume-Profit Analysis Cost Accounting

Kool-skinz Company manufactures custom-designed skins (covers) for iPods and other portable MP3 devices. Variable costs are $10.80 per custom skin, the price is $18, and fixed costs are $66960.

Required:

1. What is the contribution margin for one custom skin?

2. How many custom skins must Kool-skins Company sell to break even?

3. If Kool Skins Company sells 12000 custom skins, what is the operating income?

4. Calculate the margin of safety in units and in sales revenue if 12000 custom skins are sold.

McDuffy's Inc has developed a chew-proof dog bed-the McTuffie. Fixed costs are $144000 per year. The average price for the McTuffie is $32 and the average variable cost is $24/unit. Currently, McDuffie produces and sells 20000 McTuffies.

Required:

1. How many McTuffies must be sold to break even?

2. If McDuffy wants to earn $46000 in profit, how many McTuffies must be sold? Prepare a variable costing income statement to verify your answer.

3. Supposed that McDuffy would like to lower the break-even units to 12000. The company does not believe that the price or fixed cost can be changed. Calculate the new unit variable cost that would resulting in break-even units of 12000

4. What is McDuffy's current contribution margin and operating income? Calculate the degree of operating leverage (round to two decimal places) if sales increased by 10% next year. What would the percent change in operating income be? What would the new total operating income for next year be?

Sash Melton owns and operates The Green Belt Company (GBC), which produces live plants and flower arrangements to professional offices. Sasha has fixed costs of $2389 per month for office/greenhouse rent, advertising, and a delivery van. Variable costs for the plants, fertilizer, pots, and other supplies aver $25/job. GBC chares $60 per month for the average job.

Required:

1. How many jobs must GBC average each month to break even?

2. What is the operating income for GBC in a month with 65 jobs? With 90 jobs?

3. Sasha faces a tax rate quality to %30. How many jobs must Sasha have per month to earn an after-tax income of $980? (round to nearest whole unit)

4. Suppose that Sasha's fixed costs increase to $2500 per month and she decides to increase the price to $75/job. What is the new break-even point in number of jobs per month? (round to the nearest whole number of jobs)

Sara Pacheco is a sophomore in college and earns a little extra month by making beaded key ring accessories. She sells them on Saturday mornings at the local flea market. Sara charges $5 per unit and has unit variable costs (beads, wire rings, ext.) of $2. Her fixed costs consist of small pliers, a glue gun, etc. which cost her $90/

Required:

1. Calculate Sara's break even units

2. Prepare a profit-volume graph for Sara

3. Prepare a cost-volume-profit graph for Sara.

BB Company produces a variety of breads. The plant manager would like to expand production into sweet rolls as well. The average price of a loaf of bread is $1. Anticipated price for a package of sweet rolls is $1.50. costs for the new level of production are as follows:

Cost driver Unit variable cost Level of cost driver

Loaf of bread 0.65 -

Package of sweet rolls 0.93 -

Setups 300 250

Maintenance hrs 15 3500

Other data:

Total fixed costs (traditional) $185000

Total fixed costs (ABC) 57500

BB believes it can sell 600000 loaves of bread and 200000 packages of sweet rolls in the coming year.

Required:

1. Prepare a contribution-margin-based income statement for the next year. Be sure to show sales and variable costs by product and in total

2. Compute the break-even sales for the company as a whole using conventional analysis.

3. Compute the break0even sales for the company as a hole using activity-based analysis.

4. Compute the break-even units of each product in units. Does it matter whether you use conventional analysis or activity based analysis? Why or why not?

5. Supposed that VV could reduce the setup cost of $100 per setup and could reduce the number of maintenance hrs needed to 1000. How many units of each product must be sold to break even in this case? (round to nearest whole unit)