Cost-volume-profit analysis

Second part of the presentation. See background information for the Module 1 SLP.

Required:

Include the following items in your presentation:

· What about special pricing for some markets or customers?

· Determination of customer profitability.

· Show effect on revenues and profitability based on stated assumptions.

· Potential advantages and disadvantages, both financial and non-financial.

SLP Assignment Expectations

Submit a PowerPoint presentation or a Word Document. A PowerPoint presentation should have no more than six slides and a Word document cannot exceed two pages. Use words, tables, and graphs to make a succinct presentation. Document all sources and provide links at the end. It is acceptable to add another slide or page to list the sources.

Combine the submissions from prior module(s) into one file before uploading to the SLP 2 Dropbox.

Module 1 – SLP

ACCOUNTING COST SYSTEMS AND COST BEHAVIOR

You are applying for a managerial position at an innovative and rapidly growing company. This is a dynamic company that wants an individual who adds value to the organization. Managers at this company wear many hats, so the position requires managing products, people, and financial aspects of running the company.

As part of the interview process, you are required to make a presentation covering four different topics, one per module for this course.

You choose the company and the new product that you want to showcase in your presentation. It can be real or fictitious (based on an industry). This is for background purposes only. The presentation is to showcase your abilities and what you can contribute to the organization.

IBIS World  (access on the Portal through the Online Classroom & LibraryAdditional Library Resources link) and BizStats have estimates of cost of goods sold and some other categories of operating expenses. Information about contribution margins is not available, but adding new products typically mean incurring both fixed and variable costs. Consequently, cost of goods sold is a reasonable estimate. Net operating income as a percentage of sales or some variation thereof may also be relevant if the new product is expected to contribute significantly to the bottom line. As a candidate for a position you would not have internal information available, but being resourceful and being a skilled researcher are desired traits for the position. IBIS World also has a wealth of other market statistics that may be helpful. Use listed background material and other resources as needed.

Required:

Include the following items in your presentation.

· Present an idea for a new product.

· Describe the product.

· Show some cost estimates and pricing suggestion for this product based on research.

· What approach would you use to determine selling price (for example cost plus or target costing)? It is important when choosing a design.

· Explain your rationale for the pricing approach.

· Show expectations of growth and potential profit.

SLP Assignment Expectations

Submit a PowerPoint presentation or a Word Document. A PowerPoint presentation should have no more than six slides and a Word document cannot exceed two pages. Use words, tables, and graphs to make a succinct presentation. Document all sources and provide links at the end. It is acceptable to add another slide or page to list the sources.

Module 2 – Home

COST–VOLUME–PROFIT ANALYSIS

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

· Case

· Apply break-even analysis to a business scenario.

· SLP

· Identify special pricing issues.

· Discussion

· Explain predictive accounting.

· Explain embedding of business analytics.

Module Overview

Cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per-unit variable costs, total fixed costs, and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of production facilities to acquire.

The variable costing income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.

Sales, variable expenses, and contribution margin can also be expressed on a per-unit basis or as a percentage.

Contribution margin ratio (CM ratio)

The CM ratio is calculated by dividing the total contribution margin by total sales.

The CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit.

Break-even analysis

The break-even point can be computed using either the equation method or the contribution margin method.

The equation method is based on the contribution approach income statement.

The equation can be stated in one of two ways:

Profits = (Sales – Variable expenses) – Fixed Expenses

or

Sales = Variable expenses + Fixed expenses + Profits

The contribution margin method has two key equations:

Break-even point in units sold = Fixed expenses divided by CM per unit

Break-even point in sales dollars = Fixed expenses divided by CM ratio

The margin of safety

The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales.

Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization’s cost structure.

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.

An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with a lower proportion of fixed costs.

A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with a lower proportion of fixed costs.

Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Operating leverage

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales.

The degree of operating leverage is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. It is computed as follows:

Degree of operating leverage = Contribution margin divided by net operating income

The degree of operating leverage is not a constant—like unit variable cost or unit contribution margin—that a manager can apply with confidence in a variety of situations. The degree of operating leverage depends on the level of sales and must be recomputed each time the sales level changes. Also, note that operating leverage is greatest at sales levels near the break-even point and it decreases as sales and profits rise.

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