Professional Documents
Culture Documents
CHAPTER 9:
SHORT-TERM PROFIT PLANNING:
COST-VOLUME-PROFIT (CVP) ANALYSIS
EXERCISES
9-21 (Continued)
9-1
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9-2
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BE units = F + B =
(p v)
2.
BE dollars = F + B
(p v)
p
Q = F + B
(p v)
4.
pQ = F + B =
(p v)
p
5. Q =
$75,000 + $40,000 =
($10 $6)
28,750 units
F + A/(1 t)
(p v)
COMPANY A
Amount
%
Sales
$110,000 100
Less variable costs
55,000 50
Contribution margin
$ 55,000 50
Less fixed costs
15,000
Operating income
$ 40,000
COMPANY B
Amount
%
$110,000 100
33,000
30
$ 77,000
70
40,000
$ 37,000
= 10% 1.43
= 10% 2.333
gasoline exceeds $5.637 (on average) over the next three years.
3. Some important decision factors include:
Do I need a new car, or should I save the money by fixing up my
present car, including a tune up and new tires which could help
improve gas mileage
Will gasoline prices fall? (as of December 1, 2008, gasoline prices
had fallen to below $2.00 per gallon, and Chryslers promotion would
have made no sense; but gasoline had increased to $2.60 per gallon
in June of 2009)
Should I look to use mass transit and reduce the gas I use in that
way?
Should I look for a vehicle which gets much better gas mileage than
the one described?
If in an urban area or where it is available, should I use car-share
programs?
9-30 Cost Structure of Retailers; the Internet; Operating Leverage (10
min)
1. A retailer can significantly reduce its operating leverage and reduce
costs during a period of initial growth in e-commerce by outsourcing
its e-commerce activity to service-providers. The term ESP for ecommerce service provider is sometimes used for this type of
service. The concept could make very good sense for a retailer that is
just getting its feet wet in online sales and service over the Internet.
Not only does it reduce the required investment in fixed costs, but it
also provides a partner with the expertise to help the retailer become
successful.
2. Globalization presents an opportunity for the retailer to obtain the
outsourcing service in low-cost countries throughout the world.
Some of the most reliable and lowest-cost ESPs are located in India
and other Asian countries.
9-7
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9-8
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-9
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-10
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9-34 (continued-1)
2. The Goal Seek tool is available under Data//What-if Analysis/Goal Seek
in Excel. An example of how it is used is show below. The price would
have to increase to $101.67 in order for HFI to make a $100,000 before
tax profit.
9-11
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-36 (Continued)
Second, we can rewrite the above as (where CM = total contribution
margin):
F + OI = (p v) Q
= CM
Third,
DOL = CM OI (by definition)
= (F + OI) OI
Finally,
DOL = (F OI) + 1.0
The advantage of the above specification is that we can more readily
see how sensitivity of operating profit is affected by the amount of FC in
the organizations cost structure, that is, by the amount of operating
leverage.
9-13
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PROBLEMS
9-38 Profit Planning: Multiple Products (50-60 min)
1. Break-even in units: weighted-average contribution margin approach
a. Overall breakeven point = F weighted-average contribution
margin/unit
Weighted-average unit contribution per unit
= ($15 80%) + ($40 20%) = $20 per unit
Break-even point = $400,000 $20/unit = 20,000 units
b. Breakdown of breakeven units:
Product A: 20,000 80% = 16,000
Product B: 20,000 20% = 4,000
2. Use Goal Seek (in Excel) to calculate the breakeven point, in terms of
total units:
Step One: Set Up the Equation for Operating Income
9-14
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$560,000
9-17
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-40 (Continued-1)
Step Two: Run Goal Seek
Thus, at 1,600 tests per year, the total cost under each of the two
decision alternatives would be the same: $200,000.
3. Current number of patients per year needing analysis = 4,000
# needing blood gas analysis = 4,000 35% = 1,400
The difference = 1,600 1,400 = 200 tests per year
200 is the additional number of blood gas samples (per year)
needed to break even at the $125 charge. To generate 200
additional charges, we need 200 0.35 = 571 additional patients.
9-19
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-40 (Continued-2)
4. The amount the diagnostic screening center would have to charge
clients at the current patient level:
Let p = required charge (service fee)
Current # of tests performed per year = 4,000 0.35 = 1,400
To solve for the breakeven charge rate (per test):
p 1,400 = ($75 1,400) + $80,000
p = ($105,000 + $80,000) 1,400 tests per year
p = $132.14 per test
Note: the above result could have been obtained, as well, through
the use of Goal Seek.
5. Additional factors to be considered:
a. time-value-of-money (opportunity cost of capital)the decision at
hand is really a capital budgeting problem
b. quality and reliability of the in-house testing alternative versus
outsourcing the testing procedure
c. are there alternative, more pressing needs for the proposed
$800,000 outlay? Put another way, is the proposed capital
expenditure strategically important to the organization?
d. operating riskincreasing operating leverage (i.e., the proportion
of fixed costs in the organizations cost structure) exposes the
hospital to greater fluctuations in its operating income: operating
income for organizations with greater amounts of operating
leverage is more sensitive to changes in volume.
e. would the purchase of the machine now provide a disincentive to
invest in this area in the future?
9-20
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Sales Revenue
Coupons redeemed
(note 1)
Cost of Sales (note
2)
Contribution Margin
Fixed costs (note 3)
Loss before tax
Gasoline
$100,000
(15,000)
(75,000)
$10,000
Food &
Beverage
$60,000
Other
$40,000
(36,000) =
(20,000) =
0.6 60,000 0.5 40,000
$24,000
$20,000
Total
$200,000
(15,000)
(131,000)
54,000
60,500
$(6,500)
9-42 (continued-1)
3. Allocation of total breakeven sales dollars across the three product lines
(based on sales mix determined on the basis of relative sales dollars, not
units, of the three products):
Total breakeven sales dollars (#2 above) = $224,074
Sales mix percentages, based on relative sales dollars:
Gasoline: $100,000 $200,000 =
Food/beverage: $60,000 $200,000 =
Other: $40,000 $200,000 =
0.50
0.30
0.20
$112,037
67,222
44,815
$224,074
4.
Sales revenue ($200,000 1.2)
$240,000
Variable costs (sales CM)
156,000
Contribution margin ($240,000 35%) 84,000
Less fixed costs
60,500
Profit before tax
$23,500
5. Sensitivity analysis is used to deal more effectively with uncertainty or
risk. Sensitivity analysis is a "what-if' type of analysis used to determine
the outcomes if any parameters change from the initial assumptions. For
example, revenues or costs could be changed from the initial
assumptions and a new break-even sales volume calculated.
At least three factors that make sensitivity analysis prevalent in decisionmaking today include the following:
The availability of computers and spreadsheet software has made it very
quick and easy to compute the impact of changing one or more
9-22
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-42 (Continued-2)
assumptions in a financial model.
As the business environment is becoming more dynamic and
competitive, sensitivity analysis provides management with an
understanding of the impact of changes in the environment. The
increased emphasis on productivity, competitive marketplace, changing
consumer demand, shorter product life cycle times, and faster
obsolescence of technology makes sensitivity analysis more widely
used.
Sensitivity analysis aids management in identifying the key variables
and assumptions, so the variables can be monitored or a decision made
to obtain additional information on these variables.
6. Methods, as discussed in the chapter, that can be used to address
uncertainty in the profit-planning process:
Conventional measures associated with CVP analysis:
o Degree of operating leverage (DOL)
o Margin of safety (MOS) and margin of safety ratio (MOS%)
Sensitivity analysis:
o Simple what-if analysis/analyses
o Preparation of decision tables/decision trees/expected values
(based on probability information regarding one or more variables
in the CVP model)
o Monte Carlo simulation analysis (random and independent draws
from probability distributions associated with one or more variables
in the CVP model, to generate a probability of outcomes--for
example, operating incomes)
9-23
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Breakeven Calculation:
$0 = Total revenue variable cost (supplies) fixed cost
(from above)
$0 = (Initial consultation fees + Settlement fees) VC F
$0 = ($30Q + ($15,000 0.3 0.2) Q) $10Q
$3,356,240
Q = $3,356,240 $900 =3,649 clients per year (rounded
up)
2.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
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9-26
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-44 (Continued-3)
9-27
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-44 (Continued-4)
9-28
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-29
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Current Plan
$100 $53.50 = $46.50
Proposed Plan
$100 $68.75 = $31.25
($6,000,000 + $1,250,000)
$46.50 per unit =
155,914 units
($3,000,000 + $1,250,000)
$31.25 per unit =
136,000 units
$40/unit
Proposed Plan
= 150,000 units
$3,000,000
$20/unit
9-46 (Continued-1)
Total Relevant Cost, Current = Total Relevant Cost, Proposed
($43.50 Q) + $6,000,000 = ($58.75 Q) + $3,000,000
($58.75 $43.50) Q = $6,000,000 $3,000,000
Q = $3,000,000 $15.25
Q = 196,722 units
(The above calculations show that at the current level of 150,000 units,
the firm would prefer the low-fixed-cost strategy, that is, the new plan.)
3. Use Goal Seek in Excel to confirm the answer found above in
Requirement 2:
Step #1: Define the Cost-Differential Equation (i.e., Relevant Cost of
Current Production Plan Relevant Cost of Proposed Plan)
9-31
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-46 (Continued-2)
Step #3: Generate Results, as follows:
9-33
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-34
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-48 (Continued-1)
Overall breakeven point = F weighted-average contribution margin/unit
= $306,000 $8.10/subscription = 37,778 subscriptions
Breakdown into individual products:
HPC-Weekly: 37,778 20% = 7,556
HPC-Monthly: 37,778 80% = 30,222
Total
= 37,778
Breakeven point in dollars:
Weight
20%
$47.00
$9.40
80%
$19.00
$15.20
100%
$24.60
Breakeven ($):
Total breakeven units (subscriptions)
37,778
weighted-average selling price per unit
$24.60
Total B/E ($) =
$929,333
weight
38.21%
61.79%
100.00%
product
9.19%
23.74%
32.93%
9-48 (Continued-2)
9-37
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-48 (Continued-3)
5. Sensitivity analysis table: what happens to the breakeven point as the
sales mix changes (in increments of 1%), from 15% to 25% for HPC
Weekly? Of what value to management is this type of analysis?
on%units sold)
WeightedB/ESales
(units)Mix (based
B/E
% Change
in
HPC Weekly
HPC
Monthly
Avg.
CM/Unit
Change from
Weighted15%
85%
$7.90
Base Case
Avg. CM/Unit
16%
84% (from base)
$7.94
17%
83%
$7.98
$7.90
38,734
2.53%
-2.47%
18%
82%
$8.02
$7.94
38,539
2.02%
-1.98%
19%
81%
$8.06
$7.98
38,346
1.50%
-1.48%
Base Case
20%
80%
$8.10
$8.02
38,155
1.00%
-0.99%
21%
79%
$8.14
$8.06
37,965
0.50%
-0.49%
22%
78%
$8.18
$8.10
37,778
0.00%
0.00%
23%
77%
$8.22
$8.14
37,592
-0.49%
0.49%
24%
76%
$8.26
$8.18
37,408
-0.98%
0.99%
25%
75%
$8.30
$8.22
37,226
-1.46%
1.48%
37,046
$8.26
-1.94%
1.98%
36,867
$8.30
-2.41%
2.47%
9-48 (Continued-4)
WeightedAverage
Contribution
Margin/Unit
$75,000
9-38
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
$306,000
$381,000
$8.10
47,037
8. The point of this question is to get the students started thinking about the
competitive context in which the firm operates. There are many different
relevant points that could be made. If the discussion is slow to start, ask
them to think about what a firm like HPC must do to be competitive.
There are a number of critical success factors that are likely to be
important for both domestic and foreign subscriptions. These would
include quality of presentation and timeliness and accuracy of
information, as well as competitive price. However, other factors will differ
across countries. For example, in some countries the cost of distribution
including selling and handling costs are quite high, so that it is critical in
these countries to devise new ways to deliver the subscriptions profitably.
Other factors include changes in literacy rates, the business climate, and
investment opportunities in different countries.
9-40
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Lifetime Cost
Gas Model
Hybrid
$24,174
$24,611
$24,826
$25,167
$25,478
$25,722
$26,130
$26,278
$26,783
$26,833
9-41
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-50 (Continued-1)
$4.000
$4.250
$4.500
$4.750
$5.000
$27,435
$28,087
$28,739
$29,391
$30,043
$27,389
$27,944
$28,500
$29,056
$29,611
Based on the above analysis and graph, we see that for these two
alternatives (gas-powered vs. hybrid model), and 60,000 miles total usage
over a four-year period, the lifetime costs are close, that is, they are
insensitive to the predicted cost of gas per gallon.
4. Pseudo degree of operating leverage (DOL) measure
Alternative Lifetime Mileage Assumption =
Original Assumption--Lifetime Mileage =
Assumed price-per-gallon of gas =
62,000
60,000
$4.00
9-42
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-50 (Continued-2)
Option
Gas Powered
Car
Hybrid Model
Lifetime Cost
@ 62,000
miles
$27,783
$27,685
Lifetime Cost
@ 60,000
miles
%
Change
Cost
% Change
Mileage
Pseudo
DOL
$27,435
$27,389
1.2678%
1.0818%
3.333%
3.333%
0.380
0.325
The above pseudo DOL measure for the gas-powered car indicate that from
a baseline of 60,000 lifetime miles, for each 1% change in lifetime miles
driven, lifetime cost changes by 0.38%.
The relevant measure for the hybrid, from this base, is 0.325%. What this
tells us is that for this particular example, lifetime cost for both decision
alternatives is approximately equally sensitive to changes in lifetime miles
driven.
5. Decision Table--Break-even gas price as a function of different
combinations of initial cost differential (Hybrid cost [net of rebate]
Cost of gasoline-powered model) and lifetime miles driven
Initial Cost
Difference
$2,500
$2,000
$1,500
$1,000
$500
Lifetime Miles
Driven
70,000
60,000
50,000
9-43
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9-50 (continued-3)
Initial Cost
Differential
$2,500
$2,500
$2,500
$2,000
$2,000
$2,000
Initial Cost
Differential
$1,500
$1,500
$1,500
$1,000
$1,000
$1,000
$500
$500
$500
Lifetime Miles
Driven
70,000
60,000
50,000
70,000
60,000
50,000
Lifetime Miles
Driven
70,000
60,000
50,000
70,000
60,000
50,000
70,000
60,000
50,000
For example, for the base case ($1,500 initial cost difference and 60,000
lifetime miles driven) the breakeven price per gallon is $3.881 (as found
earlier in part 2). At this price, and all other things equal, you would be
indifferent between the hybrid model and the gasoline-powered model.
Notice from the above table that the higher the initial cost differential for the
hybrid versus the gasoline-powered model, the greater the breakeven point
in terms of cost per gallon of fuel. You also notice that the breakeven gas
price is inversely related to lifetime miles driven. While both conclusions
seem intuitively appealing, the advantage of the decision table is the
structured way in which it allows you to deal quantitatively with uncertainty
surrounding the financial consequence of your decision choice.
9-50 (continued-4)
9-44
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
i
1
2
3
4
5
6
7
8
9
10
Event
p
$2.75
0.01
$3.00
0.05
$3.25
0.05
$3.50
0.05
$3.75
0.15
$3.88
0.15
$4.00
0.15
$4.25
0.20
$4.50
0.10
$4.75
0.09
Expected Lifetime cost =
Action (Decision)
Hybrid
Gas Model
$246
$242
$1,258
$1,241
$1,286
$1,274
$1,314
$1,307
$4,025
$4,017
$4,069
$4,069
$4,108
$4,115
$5,589
$5,617
$2,850
$2,874
$2,615
$2,645
$27,360
$27,401
Lifetime cost = initial cost outlay (F) + variable (gas) cost over four-year
period
Example: for the hybrid model, if the probability of gas selling at
$2.75/gallon is 0.01, then the appropriate amount is cost
component for calculating expected lifetime cost is:
(($19,000 $500) + ((60,000 27.0 mpg) $2.75/gal)) 0.01
To minimize the expected lifetime cost, we should choose the hybrid
model. However, these expected values are so close that they are
9-50 (continued-5)
9-45
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-47
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-43 1. B/E = $17,800; 2. Required sales = $30,063 (rounded up); 4. Indifference point
= $14,538 (rounded and in $000s)
9-44 1. B/E = 3,649 clients per year (rounded up); 2. Expected value = 12,600 clients
in year 1; 4. Probability is approximately 95%; probability of generating at least
$3,235,760 of operating income = 84.13%; probability of generating at least
$8,235,760 of operating income = 50%; probability of generating incremental
operating income of at least $8,235,760 = 50%.
9-45 1a. B/E = 480 seminar participants; 1b. 700 seminar participants; 2.1,054.5
participants (1,055 rounded)
9-46 1.contribution margin per unit, current plan = $46.50; contribution margin per unit,
proposed plan = $31.25; B/E, current plan = 155,914 units; B/E, proposed plan =
136,000 units; 2. Indifference point = 196,722 units
9-47 1.exact breakeven points: 156,792 for the current plan, and 132,679 under the
proposed plan; 2. calculated operating incomes at breakeven: $28 for the current
plan, and $19 for the proposed plan (note: these differ from zero because the
above-listed breakeven quantities were rounded up to the next whole number)
9-48 1.contribution margin = $11.30 per weekly subscription; contribution margin =
$7.30 per monthly subscription; 2. contribution margin ratios: 24.0% (weekly);
38.4% (monthly); 3. B/E = 37,778 subscriptions (weekly = 7,556; monthly,
30,222); B/E$ = $929,333 (weekly subscriptions = $355,111; monthly
subscriptions = $574,222); 6. required sales volume = 47,037 units; 7. required
sales volume = 66,729 units
9-49 1.unit contribution margins, $270.00 (current) and $237.50 (proposed); B/E =
134,260 (current), and 96,632 (proposed); 2. Indifference point = 409,231 units;
5. DOL at Q = 400,000 units: 1.51 (current), and 1.32 (proposed); DOL at Q =
600,000 units = 1.29 (current), and 1.19 (proposed).
9-50 1. Lifetime cost (Y) function, regular model: Y = $17,000 + (2,608.7 gals. v),
where v = cost of gas per gallon; 2. B/E gas price = $3.88/gallon; 4. Pseudo
DOL: gas-powered car = 0.380; hybrid model = 0.325; 6. expected value, lifetime
cost: gas-powered car = $27,401; hybrid model = $27,360
9-49
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