Business Reports from 2 Case Studies
Two Business Reports from Two Case Studies
Calculate the annual contribution margin and the contribution margin per lamp unit for the year ended 30th June 2010 and the expected contribution margin per lamp unit for the year ended 30th June 2011.
The contribution margin is the sales price that is received for a product, minus the cost of producing it. In the case of the lamp company that we are examining, the annual contribution margin is $1,860,000. The contributions margin per lamp is $46.50. The expected contribution margin per lamp is $50.80. (Contribution Margin 2010)
Using the contribution margin approach, calculate the company’s break — even point in units and sales dollars for the year ended 30th Junes 2010 and expected breakeven point in units and sales dollar for the year ended June 30th 2011.
The breakeven point for the company is: $46.50 (per unit) and $1,860,000 (annually) for 2010. As far as 2011 is concerned the breakeven point is: $50.80 (per unit) and $2,082,000 (annually).
What is the contribution margin ratio (CMR) for the year ended 30th June 2010 and expected CMR for the year ended 30th June 2011?
The contribution margin ratio is calculated by taking the contribution margin and dividing it into contribution sales. For 2010, the company would have a contribution margin ratio of .256 and .247 for 2011. (Contribution Margin Ratio 2009)
Using CVP analysis, how many lamps must Yandina Company sell in the year ended 30th June 2011 to have a net operating profit after tax (NPAT) of $1,000,000?
Using CVP analysis, it is clear that the company has breakeven point of $2,082,000. However, to have net operating profit of $1,000,000 in 2011, the company would have to sell 29,630 units. (Cost Volume Profit Analysis 2010)
Will the Yandina Company achieve the desired 2011 net operating profit after tax (NPAT) of $1,000,000 if sales for 2011 remain at 40,000 lamps (as in 2010)? Explain in the international memorandum method mentioned below, briefly in about 50 words, why or why not.
Subject: 2011 net operating profit after tax in 2011.
The purpose of this analysis is to highlight the breakeven point for Yandina Company in 2011. This will help us to understand the underlying strengths and weaknesses of the company.
Net Operating Profit after Tax
The company will be able to easily maintain the desired net operating profit after taxes. The reason why is because, the sales of 40,000 units would generate a net operating profit after taxes of $1,350,000.
Clearly, the sale of 40,000 units will help Yandina be able to achieve it net operating profit after tax.
Using the contribution margin approach, calculate the new break even sales in lamp unit and sales dollars for the year ended 30th June 2011 if there was an unexpected 20% increase in total fixed costs (and not the expected 8% as mentioned above).
The new breakeven point in lamp unit sales is $51.70 and sales dollars is $2.093 million.
Explain, in about 200 words in the internal memorandum mentioned below, how cost volume profit (CVP) analysis can be used by management to predict the new breakeven point and profit if a decrease in selling is expected to result in an increase in sales.
Subject: CVP and the Break Even Point
The CVP monitors the stability of various goods and services used in a product. At the same time, it helps to determine if these prices are increasing.
This is useful for management, because it helps them to determine if this decrease in prices will have an impact upon the overall bottom line. Once they have determined this, they can be able to take steps to protect the company’s profit margin
This is important, because it highlights an effective tool that managers can use to address the underlying challenge they could face.
One of the assumptions underlying CVP analysis is that total costs remain constant over the relevant range of activity. What does this mean and how does fixed costs per unit per lamp unit change with increased production over the relevant range of activity? Provide your answer in about 200 words in the international memorandum mentioned below.
Subject: Fixed Cost per Unit
CVP production will help managers be able to effectively monitor costs and determine the underlying impact that they will have on the profit margins.
The increased cost per unit will depend upon the volatility in the costs, in association with the product. Where, cost increases could erode the profit margin, while cost decreases could result in an improvement.
These different elements are important, because they highlight the underlying effect that this can have on an organization’s profits. As a result, managers will use this as tool to carefully monitor what is taking place.
Calculate the unit cost for each product using direct labor hours as the basis for applying overhead (i.e. The Plantwide approach).
The unit cost for amateur bicycles using direct labor is $2.00. While, the unit cost for professionals is $3.00. (Mehta 2010)
Calculate the unit cost for each product using activity-based costing (i.e. ABC approach) and new selling price for each bicycle using the cost plus 20% mark up method.
The new selling price for amateur bicycles is $24.54 and professional cycles are $37.44. (Mehta 2010)
Discuss the weaknesses of Plantwide overhead costing approach and the merits of an activity based overhead costing system. Use your calculation from requirement 1 and 2 for this question to demonstrate the specific effect of each costing method on (1) the accuracy of each product cost (2) the new selling prices and marketability of each product for the new selling prices with the current percentage under the mark up method, (3) the true per unit and monthly profitability of each product for the current and new selling price, and (4) each decision about future production planning and budget allocation of resources for each of the two products. Your discussion should be a maximum of 1,000 words.
The cost method helps to improve the accuracy by providing a real time figure (20%), to establish the selling price. The mark up method helps to improve flexibility, by allowing for prices to be adjusted. This improves the true per unit and monthly profitability figures, because it can increase the accuracy of these numbers. Future budget production / planning should be allocated based upon, the underlying demand for both products.
Contribution Margin, 2010, Dynamic Business Plan. Available from: [30 October 2010].
Contribution Margin Ratio, 2009, Accounting for Management. Available from: [30 October 2010].
Cost Volume Profit Analysis, 2010, Cliffs Notes. Available from: [30 October 2010].
Mehta, S, 2010, How to Calculate Cost Per Unit. Available from: [30 October 2010].
Harvard Format. http://libguides.library.uwa.edu.au/data/files2/49275/Harvard%20LibGuide%20-%20All%20Examples%20PDF.pdf
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