Cost Volume Profit Analysis Running Head

Cost Volume Profit Analysisrunning Head Cost Volume Profit Analysis1c

Cost-Volume-Profit Analysis 1 COST-VOLUME-PROFIT ANALYSIS 5 TO: Management, Bargain Shoe Store FROM: Senior Accountant DATE: August 23, 2017 SUBJECT: Promotional Campaign Analysis The promotional campaign developed by Mary Willis and the advertising department has been fully examined to include an analysis of the current and proposed break even points and margins of safety for Bargain Shoe Warehouse (BSW). Additionally, I have prepared a Cost-Volume-Profit income statement for current operations and for the proposed changes for management consideration. Break Even Analysis Mary proposed increasing fixed cost by 24,000 dollars through lighting upgrades and increasing display space. Under Mary’s plan, variable costs would remain unchanged and the price per pair of shoes would drop 5 percent to 38 dollars per pair.

The break-even analysis concludes that BSW currently breaks even at 16,875 units sold, whereas, with Mary’s proposal, BSW would not break even until 21,000 units were sold which exceeds current sales by 1,000 units. Break Even Analysis Current Business Plan Mary’s Business Plan Fixed Costs $ 270,000.00 $ 294,000.00 Variable Costs $ 24.00 $ 24.00 Price $ 40.00 $ 38.00 Break Even Point 16,875 units 21,000 units Margin of Safety Analysis Mary projects that sales will increase from 20,000 units currently to 24,000 units when the plan is implemented. As shown below BSW currently operates at a 16 percent margin of safety ratio which would reduce to 13 percent with Mary’s proposal. In other words, BSW could experience a reduction of 3,125 units sold, under the current business model, before operating at a loss, whereas, with Mary’s plan BSW could only suffer a reduction of 3,000 units sold of the projected increase of 4,000 units sold.

If BSW’s sales remain constant even after implementing Mary’s business plan, then BSW would be operating at a tremendous loss. Margin of Safety Analysis Current Business Plan Mary’s Business Plan Units Sold 20,000.,000.00 Actual Sales $ 800,000.00 $ 912,000.00 Break Even Sales $ 675,000.00 $ 798,000.00 Margin of Safety Ratio 16% 13% Reduction in Units Sold 3,125 units 3,000 units Cost-Volume-Profit Analysis A Cost-Volume-Profit (CVP) analysis is a study that investigates the effect of cost and volume changes in cost and volume on a company’s profits (Kimmel, Weygandt, & Kieso, 2016). As shown in the CVP analysis below, BSW could more than double their net income with Mary’s business plan. Cost-Volume-Profit Analysis Current Business Plan Mary’s Business Plan Sales $ 800,000.00 $ 912,000.00 Variable Costs $ 480,000.00 $ 504,000.00 Contribution Margin $ 320,000.00 $ 408,000.00 Fixed Costs $ 270,000.00 $ 294,000.00 Net Income $ 50,000.00 $ 114,000.00

Conclusion The results of the three analyses performed reveals that if Mary’s business plan is based on solid evidence then BSW can more than double net income although there exist several concerns. First, BSW must increase sales by a minimum of 1,000 units sold to break even, if sales do not increase then BSW will operate at a huge loss. Second, changes in the margin of safety ratio are deemed negligible if projected sales are achieved, however, the margin of safety value would decline significantly should BSW experience only half the increase in sales that Mary projects. Third, if BSW experiences an increase in sales volume that is only half of what Mary projected then net income would drop to 38,000 dollars from its current value of 50,000 dollars. Given the potential increase in BSW’s net income by investing in upgrades and reducing the sales price of products it is recommended that Mary’s research be validated before implementing.

If Mary’s sales projections cannot be validated, then it is recommended that her business plan not be implemented. Senior Accountant References Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.

Sample Paper For Above instruction

The analysis of the Bargain Shoe Warehouse (BSW) case through the lens of cost-volume-profit (CVP) analysis provides valuable insights into the potential financial impact of Mary Willis’s proposed promotional campaign and operational changes. CVP analysis is a fundamental managerial accounting tool used to understand how changes in costs and volume affect a company's profit margins. It is crucial for strategic decision-making, especially when considering alterations to fixed and variable costs, pricing strategies, and sales volume projections. This paper discusses the core findings from the CVP analysis, break-even points, margins of safety, and the implications for management decision-making.

Firstly, the break-even analysis highlights the critical sales volume required for BSW to avoid operating at a loss. Currently, BSW breaks even at 16,875 units sold, with fixed costs of $270,000, a price of $40 per pair, and variable costs of $24 per pair. Under Mary’s proposed plan, which involves an increase in fixed costs by $24,000 due to lighting upgrades and display enhancements, along with a 5% reduction in selling price to $38 per pair, the break-even units increase to 21,000 units. This indicates that while the studio's fixed costs are projected to rise, the higher sales volume needed to break even presents a potential challenge. Management must evaluate whether projected sales increases will materialize to meet this higher threshold. If sales do not increase sufficiently, the company risks operating at a loss, highlighting the importance of accurate sales forecasting and market validation.

Secondly, the margin of safety analysis assesses the risk associated with projected sales volumes. Currently, BSW operates with a margin of safety ratio of 16%, meaning sales are comfortably above the break-even point. However, with Mary’s plan, this margin is projected to decline to 13%. The margin of safety indicates the extent by which sales can fall before losses occur; therefore, a reduction from 16% to 13% suggests a narrowed buffer. If actual sales fall short of projections, the company faces potential losses sooner than anticipated, emphasizing the importance of realistic sales assumptions and market demand validation. The analysis demonstrates that even a slight downturn in actual sales can significantly impact profitability ratios.

Third, the CVP data illustrate the potential for increased net income. Under the current plan, net income stands at $50,000, whereas Mary’s plan projects an increase to $114,000—a more than doubling of profits. This substantial growth potential is linked to increased sales volume, higher contribution margin due to price decreases but maintained costs, and controlled fixed costs. Nevertheless, these projections depend heavily on sales volume increases from 20,000 to 24,000 units. If these targets are not met, profits could diminish, especially given the sensitivity of margin ratios. Therefore, management must critically assess the validity of sales forecasts and consider external factors such as market trends, customer preferences, and competitive actions.

In conclusion, the CVP analysis indicates that while there are significant opportunities for profit growth under Mary’s plan, there are also notable risks associated with sales volume uncertainties. To capitalize on potential gains, rigorous validation of sales projections is recommended. If the projections are verified and market conditions support increased sales, the firm could see a substantial increase in profitability. Conversely, without validated sales forecasts, pursuing Mary's plan may jeopardize financial stability. Therefore, strategic decisions should be aligned with validated data, cautious risk management, and comprehensive market analysis to ensure sustainable growth and profitability for BSW.

References

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