Single Excel Worksheet Details With Your CFO Assistan 028943

Single Excel Worksheetdetailswith The Help Of Your Cfo You Have Put

With the help of your CFO, you have put together the following preliminary budget figures based on last year's numbers for a planned production and sales level of 4,000 units per month: Building depreciation $200,000/yr, Machine operators $100,000/yr, Management staff $400,000/yr, Direct materials $4,000,000/yr, Other expenses that vary with production $3,000,000/yr, Other expenses that do not vary $1,300,000/yr, Selling price per unit $5,000/unit. Utilities costs are variable and fixed components; data for high-low analysis: $20,000/month with no production and $40,000/month at 4,000 units/month.

This report aims to analyze the nature of each cost category, compute contribution margin, determine breakeven levels, and evaluate impacts of strategic decisions, including additional expenses and profit goals, based on last year's actual performance data.

Paper For Above instruction

Analysis of Cost Behavior and Break-Even Calculation

Understanding the behavior of costs in relation to production levels is essential for financial planning and decision-making within a manufacturing context. The data provided by the CFO offers a comprehensive overview of total costs categorized under fixed, variable, and mixed types. Analyzing these components enables the calculation of contribution margin, breakeven points, and profitability scenarios, which are critical for strategic management and operational adjustments.

1. Classification of Cost Categories

Based on the provided data, the classification of each cost category into variable, fixed, or mixed is as follows:

  • Building depreciation ($200,000/year): This is a fixed cost because depreciation is a non-cash expense that remains constant regardless of production volume, reflecting the systematic allocation of asset cost over its useful life.
  • Machine operators ($100,000/year): Typically considered a variable cost as labor costs often change with production levels; however, if operators are salaried regardless of output, they could be fixed. Based on standard manufacturing practices, variable labor costs are more common; thus, for this exercise, assume variable behavior.
  • Management staff ($400,000/year): Usually treated as a fixed cost because managerial salaries tend to remain unchanged within relevant activity levels, aiming to oversee operations irrespective of production volume.
  • Direct materials ($4,000,000/year): Variable cost, directly proportional to the number of units produced, as more units require more raw materials.
  • Other expenses that vary with production ($3,000,000/year): By definition, these are variable costs, since they escalate with increased production activity.
  • Other expenses that do not vary ($1,300,000/year): Fixed costs, as they are constant regardless of production volume.

Overall, the variable costs include direct materials and variable other expenses, while fixed costs encompass building depreciation, management staff salaries, and fixed other expenses. The classification aligns with standard cost behavior assumptions but should be refined with actual operational data where available.

2. Identification of Mixed Costs

The utilities costs demonstrate a mixed nature, combining fixed and variable components. Using the high-low method:

- At zero production, utilities cost $20,000/month (fixed component).

- At 4,000 units/month, utilities cost $40,000/month.

The variable utility cost per unit is calculated as:

Variable component = (High cost - Low cost) / (High activity level - Low activity level)


= ($40,000 - $20,000) / (4,000 units - 0 units)


= $20,000 / 4,000 units = $5/unit

The total fixed component is found by subtracting variable costs at the high activity level from total costs:

Total fixed utilities cost = Total utilities cost at high activity - (Variable cost per unit * number of units)


= $40,000 - ($5 * 4,000)


= $40,000 - $20,000 = $20,000

Thus, utilities costs are Semi-variable, involving $20,000 fixed monthly cost plus $5 per unit variable cost.

3. Contribution Margin 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


= $5,000 - ($4,000,000 / 4,000 units + $3,000,000 / 4,000 units)


= $5,000 - ($1,000 + $750) = $5,000 - $1,750 = $3,250

Here, direct materials and "other variable expenses" are combined as total variable costs per unit:

Variable costs per unit = ($4,000,000 + $3,000,000) / 4,000 units = $7,000,000 / 4,000 units = $1,750 per unit
However, it appears that direct materials are a primary variable cost at $4,000,000 per year, equating to $1,000 per unit, while other variable expenses sum to $750 per unit, collectively totaling $1,750 per unit. Meanwhile, fixed costs total: 
Fixed costs = Building depreciation + Management salaries + Fixed other expenses


= $200,000 + $400,000 + $1,300,000 = $1,900,000

The breakeven point in units is calculated as:

Breakeven units = Fixed costs / Contribution margin per unit


= $1,900,000 / $3,250 ≈ 584.62 units

And in sales dollars:

Breakeven sales dollars = Breakeven units * Selling price per unit


= 585 units * $5,000 ≈ $2,925,000

Thus, approximately 585 units sold monthly at this price point are needed to break even, excluding utilities.

4. Profit Planning and Additional Sales Requirements

To achieve a $10,000 monthly profit, the required sales volume in units is:

Units needed = (Fixed costs + Desired profit) / Contribution margin per unit


= ($1,900,000 + $10,000) / $3,250 ≈ 585 units


+ Additional units to cover profit: $10,000 / $3,250 ≈ 3 units


= 588 units

The corresponding sales dollars are:

Sales dollars = 588 units * $5,000 = $2,940,000

Adding $300,000 yearly administrative expense increases monthly expenses by $25,000 ($300,000 / 12 months). The additional units needed to cover this new expense are:

Additional units = Additional fixed expense / Contribution margin per unit


= $25,000 / $3,250 ≈ 8 units

Therefore, the company must sell approximately 8 extra units per month to cover the new administrative costs.

Conclusion

This analysis underscores the importance of accurately classifying costs, understanding cost behavior for effective decision-making, and strategic planning tools such as contribution margin and breakeven analysis. Variations in cost structures profoundly impact profit planning, particularly when considering future expenses or profit targets. Managers must continually evaluate these insights to optimize production levels, pricing strategies, and cost management to ensure financial sustainability and growth.

References

  • Drury, C. (2013). Cost and Management Accounting. Cengage Learning.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Robin, K., & Sharma, R. (2020). Analysis of Cost Behavior and its Impact on Business Profitability. Journal of Business Accounting, 12(3), 107-125.
  • Hilton, R. W., & Platt, D. E. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  • Banerjee, S., & Mukherjee, S. (2019). Utility Cost Analysis in Manufacturing: High-Low Method Application. International Journal of Production Economics, 216, 105-116.
  • Kaplan, R. S., & Atkinson, A. A. (2015). Advanced Management Accounting. Pearson.
  • Anthony, R. N., & Govindarajan, V. (2007). Management Control Systems. McGraw-Hill Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial & Managerial Accounting. Wiley.
  • Blocher, E., Stout, D. E., & Cokins, G. (2019). Cost Management: A Strategic Emphasis. McGraw-Hill Education.

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