Single Excel Worksheet Details With Your CFO Assistance

Single Excel Worksheetdetailswith The Help Of Your CFO You Have Put

With the help of your CFO, you have put together preliminary budget figures based on last year's data for a planned production and sales level of 4,000 units per month. The figures include depreciation, salaries, materials, variable and fixed expenses, and utility costs. Your task involves analyzing this data to categorize costs, calculate contribution margin, determine breakeven points, and evaluate the impact of additional expenses.

Paper For Above instruction

This report aims to analyze the cost structure and profitability metrics of a manufacturing business based on last year's actual performance data. By categorizing costs into fixed, variable, and mixed, and computing key financial indicators such as contribution margin and breakeven point, the analysis provides valuable insights into the company's operations and financial planning.

1. Classification of Cost Categories: Variable, Fixed, and Mixed

The first step is to classify the eight cost categories into variable, fixed, or mixed. Fixed costs are expenses that remain constant regardless of production volume within a relevant range, while variable costs change proportionally with production levels. Mixed costs contain both fixed and variable components.

Based on the provided data:

  • Building depreciation ($200,000/year): Fixed. Depreciation is a non-cash expense that does not vary with production volume.
  • Machine operators ($100,000/year): Fixed in this context, assuming salaries are fixed; however, if wages fluctuate with hours worked, it may be variable. But typically, salaried operators are fixed costs.
  • Management staff ($400,000/year): Fixed, as management salaries tend to be constant regardless of production levels.
  • Direct materials ($4,000,000/year): Variable. Materials costs usually vary directly with production volume.
  • Other expenses (variable, $3,000,000/year): Variable. By definition, these vary with production levels.
  • Other expenses (fixed, $1,300,000/year): Fixed. These are costs that do not fluctuate with production.
  • Selling price per unit ($5,000/unit): Not a cost, but a revenue component.
  • Utilities: Likely mixed. Data indicates utilities cost increases from $20,000/month at no production to $40,000/month at 4,000 units. This pattern suggests a mixed nature with a fixed base and a variable component.

2. Identification of Mixed Costs

Utilities costs demonstrate a mixed cost pattern. Using the high-low method:

High activity: 4,000 units/month, Utilities: $40,000/month


Low activity: 0 units/month, Utilities: $20,000/month

Variable component per unit:

Variable cost per unit = (High cost - Low cost) / (High units - Low units) = ($40,000 - $20,000) / (4,000 - 0) = $20,000 / 4,000 = $5 per unit

Fixed base utilities cost:

Fixed cost = High cost - (Variable cost per unit × high units) = $40,000 - ($5 × 4,000) = $40,000 - $20,000 = $20,000 per month

Therefore, utilities are semi-variable with a fixed component of $20,000/month and variable component of $5 per unit.

3. Contribution Margin Calculation and Breakeven Analysis

Ignoring utility costs, the contribution margin per unit is calculated as:

Contribution Margin per Unit = Selling Price per Unit - Variable Costs per Unit

Assuming only direct materials and other variable expenses vary with production:

  • Direct materials: $4,000,000/year for 4,000 units/month x 12 months = 48,000 units/year. Alternatively, per month: $4,000,000 / 12 = $333,333.33, which yields a variable cost per unit: $333,333.33 / 4,000 = $83.33.

    However, for simplicity, since the data is annual, and we're looking per-unit basis, dividing the annual variable costs directly by 48,000 units/year is more accurate: $4,000,000 / 48,000 = $83.33 per unit.

  • Other variable expenses: $3,000,000/year for 48,000 units = $62.50 per unit.

Total variable cost per unit: $83.33 + $62.50 = $145.83.

And the contribution margin per unit:

$5,000 - $145.83 ≈ $4,854.17

In percentage:

Contribution margin ratio = (Contribution Margin per Unit / Selling Price) × 100


= ($4,854.17 / $5,000) × 100 ≈ 97.08%

To find the breakeven point in units:

Breakeven units = Total Fixed Costs / Contribution Margin per Unit


Total Fixed Costs = Building depreciation + Salary expenses + Fixed management and fixed expenses


= $200,000 + $100,000 + $400,000 + $1,300,000 = $2,000,000


Breakeven units = $2,000,000 / $4,854.17 ≈ 412 units

Thus, approximately 412 units must be sold per month to break even, ignoring utilities costs.

4. Target Profit Analysis

To achieve a profit of $10,000/month:

Required contribution margin = Fixed costs + Desired profit


= $2,000,000 + $10,000 = $2,010,000


Units needed:


= $2,010,000 / $4,854.17 ≈ 414 units

Sales dollars corresponding to this volume:

Units × Selling Price = 414 × $5,000 = $2,070,000

5. Impact of Additional Administrative Expense

Additional annual expense: $300,000, translating to $25,000/month.

To cover this expense:

Additional units needed:


= $25,000 / Contribution Margin per Unit


= $25,000 / $4,854.17 ≈ 5.15 units

Therefore, approximately 6 extra units per month are needed to offset the new administrative expense.

These calculations provide a comprehensive analysis of the cost structure, breakeven point, and profitability considerations based on last year's data, offering valuable guidance for future planning and managerial decision-making.

References

  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2019). Introduction to Management Accounting. Pearson.
  • Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
  • Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson Education.
  • Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
  • Drury, C. (2013). Cost and Management Accounting. Cengage Learning.
  • Shim, J. K., & Siegel, J. G. (2009). Budgeting Basics and Beyond. Wiley.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting. Wiley.
  • Horngren, C. T., Datar, S. M., & Rajan, M. (2012). Cost Accounting: A Managerial Emphasis. Pearson.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.

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