A Case Study of Cvp Analysis Essay

1756 Words Sep 9th, 2013 8 Pages
1. Business overview & Cost analysis
In order to compete with other milkshake shacks on the same beach of the resort, the small shake in my shack is priced at $5.00, a medium shake costs $7.00, and a large shake is priced at $10.00. My shack offers classic flavors of chocolate, strawberry and vanilla, but also caters to eclectic tastes with raspberry, mocha, Oreo shakes and many other different flavors. I use chocolate, strawberry and other flavored syrup to provide the flavor chosen by customers. The data for milkshake costs is base on the study of existing restaurants, industry reports and research on expected minimum costs to be incurred in operating the business.
The cost of materials needed to make milkshakes is shown in table 1.
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Small (30%) Medium (40%) Large (30%)
Sales price (a)………………………………...... $5*0.9=$4.5 $7*0.9=$6.3 $10*0.9=$9
Variable expenses per unit (b)…………… $1.26 $1.72 $2.18
Unit CM (a-b)*percentage…………...... 0.972 1.831 2.046

The weighted Unit CM for milkshakes will be 4.85 (0.972+1.831+2.046). Using the formula for the unit sales to attain break-even point, my shack will need 570 cups of milkshakes to break-even ($2761.93/4.85). Among all of the sales, 171 cups are small size, 228 cups are medium size, and 171 cups are large.
If I give myself a $3000 paycheck every month, it will increase the monthly fixed income to 5761.93 dollars. Hence, I will need to sell 1188 (5761.93/4.85)cups of milkshakes to break-even. Among all of the sales, 356 cups are small size, 476 cups are medium size, and 356 cups are large.

2) The Break-Even Chart
The relationships among revenue, cost, profit and volume are illustrated on a cost-volume-profit graph. A CVP graph highlights CVP relationships over wide ranges of activity. If 570 cups of milkshakes are sold, the total sales after subtracting the 10% for resort will be $3744.90 (171*5*0.9+228*7*0.9+171*10*0.9). Total variable costs will be $980.40 (1.26*171+1.72*228+2.18*171). Total fixed costs will be 2761.93, hence the profit is round up to be 0.
If 1188 cups of milkshakes are sold, the total sales after subtracting the 10% for resort will be $7804.80

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