Cost Value Profit Analysis-Memo

Posted: August 26th, 2021

Cost Value Profit Analysis-Memo

Name

Institutional Affiliation

Cost Value Profit Analysis-Memo

Charlotte Henry

Break-Even Point

A company’s break-even point is a phase when the revenues equal the costs. The Break-even point can be calculated on either units produced or the sales revenue (Jolly, 2017). At this point in a business, there are no profits or losses.

Increased display space= $25,000

Fixed cost already incurred = $250,000

Total fixed cost=$ 275,000

Price decrease= 5%   (50 to 47.5)

Increase in sales volume= 20%    (50000 to 60000)

Variable costs= $25 per T.V unit

Current break-even point in units

Break-even point in units after the new proposal

When Charlotte Henry proposal is implemented, the breakeven point shifts from the current 10000 units to 12222 units

The Margin of Safety Ratio When Charlotte Henry Proposal Is Adopted

The margin of safety is the gap between estimated sales outputscompared to the level in which a company’s sales decrease before the business breaks even (Al-Rousan, 2017). It is obtained by subtracting even breakpurchases from the forecasted sales.  The margin of safety ratio is a financial ratio that measures the sales amount above the break-even point.

The margin of safety= 40,000/50=800

The margin of safety ratio after Charlotte Henry proposal

Margin of safety= 47778/47.5=1,006

Cost Value ProfitAnalysis When Charlotte Henry Proposal Is Implemented

It is a cost accounting technique that indicates the impact that different levels of costs and sales volume will have on the operating profit or the company’s income(Jiang &Shen, 2017). Cost-volume-profit study works under several assumptions that include parameters such as sales price, variable costs and the fixed costs remain constant in the period under analysis.

Current Cost Volume Profit (CVP) INCOME STATEMENT
Details	Unit Sales	Unit Cost ($)	Amount (US $)
Sales	50,000	$50	$2,500,000
Variable Costs	10,000	$25	$            (250,000.00)
Contribution Margin (1.6% of variable costs)			$                (4,000.00)
Fixed Expenses			$            (250,000.00)
Net Income			$1,996,000
Current Cost Volume Profit (CVP) Income Statement after Charlotte Henry proposal
Details	Unit Sales	Unit Cost ($)	Amount (US $)
Sales	60,000	$        47.50	$          2,850,000.00
Variable Expenses	12,222	$25	$            (305,550.00)
Contribution Margin	1.68%		$                (4,610.93)
Fixed Expenses			$            (275,000.00)
Net income			$          2,264,839.08

Cost Value Profit Analysis-Memo

To: Bargain TV Store

From: Charlotte Henry

Date: 7^thApril 2020

After analyzing Charlotte Henry’s proposal for the Bargain TV Store, I would highly recommend that the company implement her changes. The proposal will enable the company to increase the sales units from the current fifty thousand units to sixty thousand units. An increase in the sales units will lead to more sales revenue in the future. The net income will increase from the current $1,996,000 to $2,264,839.07 when the proposal is adopted. Forecasted net income was calculated using the contribution margin ratio in determining the breakeven point in dollars. The contribution margin ratio is crucial as it determines the amount, which is needed to cover the fixed costs generating more net income. The ratio indicates the percentage increase every dollar of sales corresponds to a rise in revenue as it shows the total earnings available to make a profit after paying for the fixed costs.

When the company implements Charlotte Henry’s proposal, the break-even point will be 12, 222 T.V units from the current break-even point of 10,000 units. It implies that the net profit shall increase by the contribution margin. The proposal also has a higher contribution ratio indicating that the company will have more funds to be applied to the fixed costs generating more net income. The current margin ratio is 1.60%, but this will increase to 1.6767% after the proposal is implemented. The changes in sales revenue will result in more revenue in the company. The margin of safety is also essential in CVP analysis as it indicates the reduction in sales, which occur before the break-even point is reached. It helps the management to forecast any loss the company may experience because of variation in sales. When the margin of safety is high, it reduces the business risk of losses in the future. After the adoption of the proposal, the margin of safety will increase by 0.0767%, indicating that the risk of loss to the business will be reduced compared to the current situation. The changes proposed by Charlotte Henry have a higher margin of safety; thus, the company should implement the changes.

From the CVP analysis income statement, the management should go ahead and implement the proposal, as the net income will increase from $1,996,000 to $2,264,839.07. The net income will increase by $ 268839.07. The CVP analysis income statement is used to make short-term company decisions. Thus, after analyzing the breakeven point, marginal ratios, and CVP analysis, the management should implement the changes.

References

Al-Rousan, R. Z. (2016). The satisfactory margin of safety against shear failure of lightweight reinforced concrete beams: 3D finite element modeling. KSCE Journal of Civil Engineering, 20(4), 1482-1492.

Jolly, G. S. (2017). Unit-12 Profit Planning and Break-Even Point. IGNOU.

Jiang, Y., & Shen, Z. (2017, June). Study on the Application of CVP Analysis in the Catering Industry. In 2nd International Conference on Contemporary Education, Social Sciences,and Humanities (ICCESSH 2017). Atlantis Press.