Cost-volume-profit (CVP) analysis is a strategic decision made by the management of the company. The cost-volume-profit analysis is very helpful for the managers to make product decisions by estimating the expected profitability of the choices because different choices will affect the selling price, variable costs per unit, fixed costs, units sold and operating income. According to Alvis (2016), CVP analysis expands the use of information provided by breakeven analysis. Therefore, this paper is going to address Swill Chocolate Company’s CVP analysis in details which includes the contribution margin per unit, the breakeven points in units and dollars, the calculation of margin of safety and degree of operating leverage, and the assumption on
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On top of this, the parent company is indicating the target net income for the year is $150,000 and with a 30 percent tax rate. The following calculation shows the calculation of the assumption on changes.
The formula for target sales in unit is: Target Sales in Units= (Fixed costs+ [Target after tax income/1 tax rate)/Contribution Margin per Unit. Target Sales in Units= (236,500+40,000) + (150,000/1-30%), which is 490,785.7 round up and it is 490,786, which is divided by 1.8=272,658.8 round up 272,659 units. Formula for target sales in dollars: Target Sales in Dollars= (Fixed costs= (Target after tax income/1-tax rate)) divided by P/V Ratio. P/V Ratio=720,000/1,050,000= 0.6857*100%=68.57%. Then the calculation of breakeven point in dollars is …show more content…
These increases in both variable as well as fixed costs results in the greatest challenge in realizing a desired level of profit. In order to conduct a CVP analysis, it is important to correctly distinguish fixed costs from variable costs, and whether a cost is variable or fixed depends on the time period for a decision (Horngren, Datar, & Rajan, 2015).Therefore, it can be greatest challenge to obtain a desired level of income with the increase in material cost and the fixed cost. Managers should distinguish fixed from variable costs and then evaluate how the level of fixed costs and variable costs that they choose can affect the risk return trade- offs of the company (Horngren, Datar, & Rajan, 2015).
Conclusion
The CVP analysis is a tool that managers use to make decisions or assumptions, identify the problem and uncertainties by obtaining accurate information possible. If there are any changes occur in the number of units sold, selling price, the variable cost per unit, or the fixed costs of a product, the CVP analysis helps the manager to see the connections between the fixed costs, variable cost and other elements. Without CVP analysis, it is hard to imagine that the accountant and managers make decisions by choosing the alternatives, implementing the decisions, and evaluating
On top of this, the parent company is indicating the target net income for the year is $150,000 and with a 30 percent tax rate. The following calculation shows the calculation of the assumption on changes.
The formula for target sales in unit is: Target Sales in Units= (Fixed costs+ [Target after tax income/1 tax rate)/Contribution Margin per Unit. Target Sales in Units= (236,500+40,000) + (150,000/1-30%), which is 490,785.7 round up and it is 490,786, which is divided by 1.8=272,658.8 round up 272,659 units. Formula for target sales in dollars: Target Sales in Dollars= (Fixed costs= (Target after tax income/1-tax rate)) divided by P/V Ratio. P/V Ratio=720,000/1,050,000= 0.6857*100%=68.57%. Then the calculation of breakeven point in dollars is …show more content…
These increases in both variable as well as fixed costs results in the greatest challenge in realizing a desired level of profit. In order to conduct a CVP analysis, it is important to correctly distinguish fixed costs from variable costs, and whether a cost is variable or fixed depends on the time period for a decision (Horngren, Datar, & Rajan, 2015).Therefore, it can be greatest challenge to obtain a desired level of income with the increase in material cost and the fixed cost. Managers should distinguish fixed from variable costs and then evaluate how the level of fixed costs and variable costs that they choose can affect the risk return trade- offs of the company (Horngren, Datar, & Rajan, 2015).
Conclusion
The CVP analysis is a tool that managers use to make decisions or assumptions, identify the problem and uncertainties by obtaining accurate information possible. If there are any changes occur in the number of units sold, selling price, the variable cost per unit, or the fixed costs of a product, the CVP analysis helps the manager to see the connections between the fixed costs, variable cost and other elements. Without CVP analysis, it is hard to imagine that the accountant and managers make decisions by choosing the alternatives, implementing the decisions, and evaluating