Assignment 2: Strategic Budgeting For A Newspaper Publishing

Assignment 2 Strategic Budgetinga Newspaper Publishing Company Produc

Assignment 2: Strategic Budgeting A newspaper publishing company produces and distributes a magazine to its subscribers once each month. Although the company performs the entire publishing and distributing of the newspaper in-house, they have contacted with another magazine publisher to perform the printing and binding function for the magazine. The contract for outside printing and binding of the magazine will soon expire and the newspaper company is reviewing its options. A member of the budgeting committee has reviewed the company’s financial reports and believes that the variable costs of producing the magazine could be significantly reduced by purchasing equipment to print and bind the magazine in house.

However, in-house production would result in an increase in the company’s fixed costs. Because of your background in cost accounting and cost management, the committee is looking to you for guidance in this decision. You have decided that helping the committee understand the types of analysis that should be employed in this situation will gain support for the action you recommend. Prepare a report in which you: Explain the value of preparing a contribution income statement. Describe the concept of sensitivity analysis and explain the value of applying it during any budgeting process.

Define operating leverage and explain how analysis of operating leverage alternatives would be applied to this decision. Describe strategic reasons why the company should bring printing and binding of their magazine in house. Describe strategic reasons for not bringing printing and binding of their magazine in house. Illustrate application of the five steps of strategic decision making for CVP analysis to this decision scenario. Write a 3–5-page report in Microsoft Word format.

Apply APA standards to your work. Present your work in MS Word format. Use the following file naming convention: LastnameFirstInitial_M4_A2.doc. By Wednesday, August 27, 2014 ,

Paper For Above instruction

The decision to bring printing and binding of a magazine in-house versus outsourcing it involves complex financial and strategic considerations. A structured analysis utilizing several key financial management tools can aid in making an informed decision. This report explores the importance of contribution income statements, sensitivity analysis, operating leverage, strategic considerations, and CVP analysis to evaluate this scenario comprehensively.

The Value of Preparing a Contribution Income Statement

A contribution income statement is a fundamental financial tool that isolates variable costs from fixed costs, enabling managers to determine the contribution margin—the amount remaining after variable expenses are deducted from sales revenue. This statement allows managers to analyze how changes in sales volume impact profitability, which is particularly vital when evaluating the feasibility of in-house production. It highlights the break-even point and helps forecast the impact of scale on costs and profits, therefore supporting strategic decisions such as capital investment in new equipment for in-house printing.

Sensitivity Analysis and Its Application

Sensitivity analysis examines how sensitive the project's outcomes are to changes in assumptions or input variables such as costs, prices, or volume. During budgeting, applying sensitivity analysis helps managers understand potential risks and variabilities in the decision. For example, if variable costs decrease by 10%, how does that affect profitability? Or, if sales volume declines, at what point does the in-house production become unprofitable? Conducting this analysis provides a range of possible outcomes, enabling better risk management and strategic planning.

Understanding Operating Leverage

Operating leverage measures the degree to which a company's costs are fixed versus variable. High operating leverage implies higher fixed costs, meaning that small increases in sales can significantly increase profits, but also that sales decreases can lead to substantial losses. Analyzing different levels of operating leverage helps assess the risk associated with increased fixed costs from in-house production. For example, if the company invests in expensive printing equipment, it must evaluate whether projected sales volume justifies the higher fixed cost structure, or if it would expose the company to greater financial risk during downturns.

Strategic Reasons for Bringing Printing and Binding In-House

• Cost Control and Potential Savings: In-house production could lead to reductions in variable costs, especially if the company invests in efficient equipment. This control allows better management of production costs and potential savings in the long term.
• Quality and Consistency: Managing printing and binding internally can enhance quality control, ensuring that the final product meets specific standards consistently, which may improve customer satisfaction.
• Flexibility and Lead Time: In-house operations can provide increased flexibility in scheduling and responding to changes in demand, reducing dependence on external vendors and potential delays.
• Strategic Control: Owning the production process provides greater control over the entire publishing cycle, aligning with the company's strategic goals for branding and quality assurance.

Strategic Reasons Against Bringing Printing and Binding In-House

• High Initial Capital Investment: Purchasing equipment involves significant fixed costs, which could strain the company's finances, especially if demand fluctuates unpredictably.
• Operational Risks: Managing new production processes requires expertise; failure to manage these may result in production delays or cost overruns.
• Focus on Core Competencies: Outsourcing allows the company to focus on core activities such as content creation and distribution, rather than diverting resources to equipment maintenance and operational management.
• Market Flexibility: External suppliers may offer more flexible terms, scalable capacity, and technological advancements without the company incurring the full responsibility of upgrades.

Application of the Five Steps of Strategic Decision Making for CVP Analysis

1. Identify the decision: Whether to produce printing and binding in-house or continue outsourcing.
2. Gather relevant information: Cost estimates, capacity analysis, quality requirements, and supplier obligations.
3. Develop alternatives: Keep outsourcing or invest in new equipment for in-house production.
4. Evaluate alternatives: Use contribution margin analysis, sensitivity analysis, and assess operating leverage to forecast financial outcomes and risks associated with each option.
5. Choose the best alternative: Based on financial viability, strategic fit, and risk considerations, select the option that maximizes value aligned with the company's goals.

In conclusion, the decision to bring printing and binding in-house involves evaluating the potential cost savings against increased fixed costs and operational risks. Utilizing analytical tools like contribution income statements, sensitivity analysis, operating leverage metrics, and structured decision-making steps allows the company to make a balanced and strategic choice. The ultimate goal is to optimize financial performance while supporting long-term strategic objectives.

References

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