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Cost Volume Profit Analysis

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Cost Volume Profit Analysis

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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®.

Cost Volume Profit Analysis

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Cost Volume Profit Analysis

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OPTION #2: COMPARATIVE COST-VOLUME-PROFIT ANALYSIS CALCULATION

Phil Lesley, Controller, would like to complete a comparative cost-volume-profit analysis for the current year over the prior year for the chewing gum manufacturing plant to determine if the breakeven point was achieved, and how it may have differed between the two years.

Specific costs for production of 400,000 units each year, include the following:

2017 – Current Year
Chewing Gum Manufacturing Division Costs Variable Costs Total Fixed Costs Total
Raw materials $ 250,000
Direct manufacturing labor $ 110,000
Indirect manufacturing labor $ 42,500
Factory Insurance & Utilities $ 35,000
Depreciation — Machinery and factory $ 48,500
Repairs and maintenance —factory $ 8,000
Selling, marketing, and distribution expenses $ 10,000 $ 30,000
General and administrative expenses $ 50,000
2016 – Prior Year
Chewing Gum Manufacturing Division Costs Variable Costs Total Fixed Costs Total
Raw materials $ 245,000
Direct manufacturing labor $ 105,000
Indirect manufacturing labor $ 50,250
Factory Insurance & Utilities $ 33,750
Depreciation — Machinery and factory $ 38,500
Repairs and maintenance —factory $ 14,000
Selling, marketing, and distribution expenses $ 10,000 $ 25,000
General and administrative expenses $ 60,000

There is no beginning or ending inventories. The total sales for 400,000 units produced are $1,050,000 for 2016 and $1,200,000 for 2017.

Using Microsoft Excel, answer the following questions for each year given the fact pattern above, showing all supporting calculations and labelling answers clearly. Please refer to CSU-Global Library (Links to an external site.)Links to an external site. for Lynda.com tutorials on using Microsoft Excel or use the Excel Tutorials link found in the classroom if you need assistance.

  1. What is the contribution margin per unit for each multipack of gum produced given the fact pattern above?
  2. What is the breakeven point in units and dollars given the fact pattern above?
  3. What is the division’s margin of safety and degree of operating leverage given the fact pattern above?
  4. Create a very simple Excel table summarizing answers of each computation for each year. *Below the table in Excel, please write at least 3 observations you have regarding the data comparisons/contrasts.