ASAS PERAKAUNAN DAN KEWANGAN STQP2533

SEMESTER I 2016/2017
GROUP PROJECT
LECTURER
Prof.Madya Dr. Saiful Hafizah

GROUP MEMBERS
Pang Ghee Jian

A150204

Chong Kah Meng

A149063

Ainur Jalalia Binti Abd Rahim

A151286

Raidah Nabilah bt Ramzan

A150152

Nurul Amira bt Muhamat

A151986

Cheng Xiong Hui

A149885

Isaac Sharvindran A/L Seigar

A152128

CONTENT
No

Title

.
1
2
3
4
5

Introduction
Objective
Research Methodology
Literature Review
Fraudulent Reporting:

6
7
8

Page
3
4
5
6

Measuring Cost Behaviour

7-9

Break-Even Analysis

10

Cost-Volume-Profit Chart

11

CVP Analysis
Conclusion
Reference
Appendix

12-17
18
19
20

INTRODUCTION

Dairy Farmers of Ontario (DFO) is the marketing group for the largest sector of Ontario
agriculture and are proudly owned and operated by the farm families of Ontario's dairy farms.
Dairy Farmers of Ontario, formerly known as the Ontario Milk Marketing Board, was formed
as result of the Ontario Milk Act passed in 1965. The name Dairy Farmer's of Ontario was
utilized on August 1, 1995 as the result of a merger of the Ontario Milk Marketing Board and
the Ontario Cream Producers' Marketing Board. The mission statement of this company is
To provide leadership and excellence in the production and marketing of Canadian milk ,
while the vision statement is A dynamic profitable growing Canadian dairy industry. Being
the largest milk manufacturer in Canada , the only product of DFO is cow milk from Ontario
farm , which is the major supply of fresh milk in the market of Ontario .
For DFO to become a great company in managemet, planning their company future
activities and events is a crucial phase for it. In order to make it happen is by carry out costvolume-profit (CVP) analysis. CVP analysis is useful when management begins the planning
process and wishes to predict outcomes of alternative strategies. These strategies can involve
changes in selling prices, fixed cost, variable cost, sales volume and product mix. Managers
are interested in seeing the effects of changes in some or all of these factors.
Therefore , fundamental issue that we would like to analyze is what is the
relationship between cost of productions , sales volume and profit of DFO in 2016 . For
example , if DFO want to increase the profit from sales by 5 % , what are the alternatives can
we take to achieve that ? Therefore , Cost-Volume-Profit Analysis can help the manager in
DFO to make a business decision on that issue whether to cut down the cost of production or
to increase the sales volume to certai level . The precise answer to the issue will be answered
after the completion of this project .

OBJECTIVE
3

1. To determine the alternatives to increase the farm revenue by 10% in 2016 .

2. To determine how different operating strategies affect profit or loss of the DFO
company.
3. To determine the relationship between cost of productions , sales volume and profit of
DFO in 2016 .

RESEARCH METHODOLOGY

Our research is focused on the theoretical and relate our study with a company chosen. The
target company was in manufacturing sector. Our research methodology requires gathering
relevant data from the specified documents and compiling databases in order to analyze the
material and arrive at a more complete understanding about the best business strategy of DFO
in 2016 .From the data cost of production, we analyze and see how cost of production and
sales level affect the income. We form a table recording the past eigth (8) records of total
cost.
There are series of the relationship between cost, volume of production and profit. An
understanding of these relationship are useful to management. Cost-volume-profit
relationship as a decision making device that consider the inheret relationship between cost,
volume of production and the profit that is made.
The research study is divided into 6 chapters. Chapter one is introduction which is included
background of the industrial company. Chapter two deals with review of related literatures on
cost-volume-profit analysis as a management tool for decision making. Chapter three deals
with the objectives of the study which is what is the relationship between cost of
productions , sales volume and profit of DFO in 2016. Chapter four is about the research
methodology. Chapter five are included presentation, analysis and interpretation data about
the cost of production and sales level, and the last is chapter six will entail summary of
finding, conclusion, and recommendations for improvement in management.

LITERATURE REVIEW

Based on an article by Rosemarie Kelly, Cost-Volume-Profit (CVP) analysis examines the

relationships between changes in activity and changes in total sales revenue, costs and profit.
For CVP analysis to be useful the assumptions on which it is based must recognised. There
are several assumptions that set the rules for examining relationships between sales volume,
costs and profits. The assumptions are all variables remain constant except volume, only one
product is being produced or there is a constant sales mix, total costs and total revenue are
linear functions, profits are calculated using variable (marginal) costing, costs can be
accurately divided into their fixed and variable elements, the analysis applies only to the
relevant range, and the analysis applies only to a short-term horizon. In adopting the variable
(marginal) costing approach, CVP analysis highlights contribution as a key factor of an
organisations operations. Contribution is defined as total sales revenue minus total variable
costs and this represents the amount that is contributed towards covering total fixed costs and
generating a profit. If an organisation has sufficient contribution to cover total fixed costs but
not generate a profit, or incur a loss, this is called break-even point (BEP). Once the BEP has
been reached any further contribution generated represents profit. Using CVP analysis an
organisation may also calculate the total sales revenue (or sales volume) required to generate
a particular level of profit, called target profit. While it is important for an organisation to
know its BEP in sales volume or revenue, it is also useful to know how this relates to its
current or expected level of activity. The difference between the organisations current or
expected sales volume (or revenue) and its BEP sales volume (or revenue) is called the
margin of safety (MoS).

FRAUDULENT REPORTING
A ) Measuring Cost Behavior
6

Since we have past costs data from year 2008 to 2015 , we will use these data to estimate the
fixed cost and variable cost in 2016 by using three methods , namely scatter diagrams , highlow method and least-squares regression . Below shows the table of past cost and unit data
from 2008 to 2015 .
Year
2008

Variable Cost ( $ )
398,428

Fixed Cost ( $ )
38,027

Total Cost ( $ )
436,455

Unit Produced ( litres )

616,427

2009
2010
2011
2012

391,400
381,901
471,534
509,878

38,325
40,823
51,270
57,874

429,725
422,724
522,804
567,752

633,715
619,236
720,343
759,686

2013 526,447
58,371
2014 520,512
57,150
2015 581,496
63,483
Table 1 : Past cost and unit data

584,818
577,662
644,979

742,230
714,021
784,547

a ) Scatter Diagrams

Scatter Diagram
700,000
600,000
500,000
400,000

Total Cost ( $)

300,000
200,000
100,000
0
600,000

650,000

700,000

750,000

800,000

Volume ( Litres)

Fixed cost = y-intercept = $65,438

Variable cost per unit=

Changecost $ 567,752$ 65,438

=
=$ 0.66 per unit
Changeunits
759,6860

Thus , the cost equation that management will use to estimate cost for different unit levels is
$65,438 plus $0.66 per unit .

b ) High-Low Method

Scatter Diagram
700,000
600,000
500,000
400,000

Total Cost ( $)

300,000
200,000
100,000
0
600,000

650,000

700,000

750,000

800,000

Volume ( Litres)

From the high-low method , it shows that the fixed cost is a negative value , which is not
valid . Therefore , this method is not suitable in estimating the data .

c ) Least-Squares Regression ( Using Excel )

From the Excels regression , it shows that the y-intercept (-330,559.873) is a negative
value , which means that the fixed cost is negative . This is not valid . Hence , this method is
not suitable in estimating the data .

Out of the 3 methods, only scatter diagram method give the best estimation on the variable
cost per unit. Thus , the cost equation that management will use to estimate cost for different
unit levels is $65,438 plus $0.66 per unit .

B) Break-Even Analysis

Milk of Ontario Farm is sold at $1.20 per litre .

Contribution margin per unit = Sales price per unit Total variable cost per unit
= $1.20 - $0.66
= $0.54

Contribution margin ratio =

Contribution margin per unit

Sale price per unit
0.54
1.20

= 0.45

Break-even point in units =

costs
Contribution margin per unit
65438
0.54

= 121181 litres
Break-even point in $ = Break-even point in units x Sale price per unit
= 121181 x $1.20
= $145418

From the break-even points units calculated, this implies that we have to sell more than
121181 litres of milks in order to earn a profit .

10

C ) Cost-Volume-Profit Chart

The total cost line and the sales line intersect at 121181 litres , which is the break-even point ,
where the total sales of $145418 equals the sum of both fixed and variable costs .
On eithier side of the break-even point , the vertical distance between the sales line and the
total cost line at any specify volume reflects the profit and loss expected at that point . At
volume level lower than the break-even point , this vertical distance is the amount of
expected loss because the total line is above the total sales line . Meanwhile , at a volume
level higher than the break-even point , this vertical distance will represent the amount of
expected profit because the total sales line is above the total costs line .
Hence , a lower break-even point means that we can make profit easier compared to high
break-even point .
11

D ) CVP Analysis
i ) Compute the sales level for 10% of growth in income

The farm net income in 2015 is $432879 (from Appendix)

Target net income in 2016 = 10% growth over year 2015

= $476167

Income = Sales - Variable Costs - Fixed Costs

= Contribution Margin - Fixed Costs

Contribution margin per unit = Sales price per unit Total variable cost per unit
=

Income+ Costs
Units

Units that need to be sold to meet the target income =

Income+ Costs
Contribution margin per unit
476167+65438
0.54

= 1002972 litres

Hence , we must achieve a sale volume of 1002972 litres of milk to increase the farm revenue
by 10% in 2016 .

12

ii ) Determine the alternatives to increase the farm revenue

Now , we will examine the relationship between price , cost and the sales volume to achieve
10% profit growth .
If the variable cost per unit and fixed cost is held constant , but the sales price of one litre
milk is changed , then

Sale volume =

Target Income + Costs

Contribution margin per unit

541605
Contribution margin per unit

Price per litre ($)

Contribution Margin per unit ($)

Sales volume (litres)

0.9
1
1.1
1.2
1.3
1.4
1.5

0.24
0.34
0.44
0.54
0.64
0.74
0.84

272658
192465
148723
121181
102247
88430
77902

Impact of Price Changes on Sales volume (litres)

Sales Volume (litre)

272658
300000
250000
192465
200000
148723
121181 102247
150000
88430
100000
50000
0

77902

Price Change ($)

13

From the graph above , we can say that when selling price can be increased without
impacting costs , we only have to hit a lower sale volume to ensure that we hit the 10%
growth targe. Therefore , by refering to the graph above , the management team in DFO can
determine the sales volume level they need to achieve in order to gain 10% growth of profit ,
provided that the variable cost per unit and fixed cost is held constant . For example , if DFO
incease the price of one litre milk to $1.30 , then DFO need to sell 102247 litres of milk to
ensure 10% growth of profit

If the sales price and fixed cost is held constant , but the variable cost per unit is changed ,
Sale volume =

Target Income + Costs

Contribution margin per unit

541605
Contribution margin per unit

Variable Cost (per unit)

Contribution Margin per unit

Sales Volume (litres)

0.4
0.5
0.6
0.7
0.8
0.9
1

0.8
0.7
0.6
0.5
0.4
0.3
0.2

81798
93483
109063
130876
163595
218127
327190

Impact of Changes In Variable Cost on Sales Volume in Units

327190

350000
300000
250000

218127

200000

Sales Volume (litres)

150000
81798
100000

163595
93483

109063

130876

50000
0
0.4

0.5

0.6

0.7

0.8

0.9

Variable Cost Per Unit ( $ )

14

From the graph above , we can say that when variable cost per unit increase , the contribution
margin decrease , and thus the sale volume have to be increased .Therefore , by refering to
the graph above , the management team in DFO can determine the sales volume level they
need to achieve in order to gain 10% growth of profit , provided that the sale price and fixed
cost is held constant . For example , if the varible cost per litre milk is reduced to $0.40 , then
DFO only need to sell 81798 litres of milk to ensure 10% growth of profit.

If both the sales price and variable cost per unit is held constant,but the fixed cost is changed ,

Sales Volume =

Fixed Cost ($)

Sales Volume (litres)

40000
50000
60000
70000
80000
90000
100000

74074
92593
111111
129630
148148
166667
185185

Target Income + Costs

Contribution margin per unit

476167+ Costs
0.54

Impact Of Changes in Fixed Cost on Sales Voume

Sales Volume (litre)

200000
180000
160000
140000
120000
100000
74074
80000
60000
40000
20000
0
40000

185185
166667
148148
129630
111111
92593

50000

60000

70000

80000

90000

100000

Fixed Cost ($)

15

From the graph above , we can say that when fixed costs increase , DFO have to sell more to
cover this cost .Therefore , by refering to the graph above , the management team in DFO can
determine the sales volume level they need to achieve in order to gain 10% growth of profit ,
provided that the sale price and variable cost per unit is held constant . For example , if the
fixed cost is increased to $80000 , then DFO only need to sell 148148 litres of milk to ensure
10% growth of profit .

Therefore , the suggested alternatives to increase the profit of company are :

a ) Increase the selling price of milk .

Since DFO is the largest diary farm in Ontario , so we can say that DFO monopoly the diary
market in Ontario . Hence , by selling our dairy product at a higher price can help us to
generate more profit . People tend to ignore the price if the product are high in quality .
Besides that , DFO can manufacture new flavours of the milk to sell it with higher price .
Before this , DFO marketing team should carry out several market surveys to investigate the
reviews and feedback from our customers to determine the rating of our products among
customer mix. Furthermore, the company should plan for more promotion activities. For
example , DFO can carry out session give it away for free because this can attract more
customers to buy our dairy products . This will give a significant impact in the long terms.

b ) Decrease the variable costs .

We shall not buy crop from other crop factory , but we can build our own crop manufacturing
factory . This is a long-term investment , which can help to cut down the total variable cost
each year .Besides, the company also can try to get the volume discount from the suppliers. If
DFO company decide to reduce salaries, then they need to reduced the number of people who
are employed. It can be in any way either by making someone redundant, dismissing them or
not filling a vacancy when employee leaves. At the same time, try to look into technology to
reduce labor costs. It can be the using of machine to do some labor works in order to save the
money on labor costs without sacrificing product quality.

16

c ) Decrease the fixed cost .

There are some of the fixed cost that can be reduce such as utilities. Utilities can be reduced
through the attitude of the workers. For example, use the water in a minimum way, switch off
the electric such as lamp,fan, and machine when not being used, and always check on the
quantity and the price before purchase something. It can help the company to reduce the
wasted costs. For the building and machinery depreciationd , these expenses cannot be
reduced easily .

17

CONCLUSION

Cost behaviour is decribed in terms of how its amount changes in relation to changes in
volume of activity within a relevant range. Fixed costs remain constant to changes in volume
and total variable costs change in direct proportion to volume changes. Therefore, costvolume-profit analysis can be used to predict what can happen under alternative strategies
concerning sales volume, selling prices, variable costs or fixed costs. Application include
computing sales for a target income and break-even analysis. Meanwhile, the contribution
margin ratio reveals what portion of each sales is available as contribution to fixed costs and
income. The costs and sales for a company can be graphically illustrated using a CVP chart.

From the CVP analysis , we can coclude that DFO must achieve a sale volume of 1002972
litres of milk to increase the farm revenue by 10% in 2016 . The various alternatives to achive
this can be intepret from our analysis , which are the three graph showing the relationship
between the sale price , cost and the sales volume to achieve 10% profit growth .In general,
our suggested alternatives for DFO to increase the profit of company are increasing the
selling price of milk , decresing the variable cost and also decresing the fixed cost .

A company consider a variety of strategies in planning business operations. Cost-volumeprofit analysis is useful in helping the company to evaluate the likely effect of these
strategies, which is the focus of the section. Earlier we had showed that how changing one of
the estimates in a CVP analysis affects the sales volume . We can also examine strategies that
impact several estimates in the CVP analysis .

18

REFERENCE
John Wild, Winston Kwox, Sundar Wenkatesh, Ken W.Shaw, Barbara Chiappetta, 2016,
Fundamental Accounting Principles International Financial Reporting Standards (IFRS),
New York : McGraw-Hill Education
Lindsey, 2015, Lets Talk: Variable Costs- What They Are & 5 Ways to Reduce Them Without
Sacrificiing Quality,
http://www.tobusinessowners.com/to-business-owners/lets-talk-variable-costs-what-they-are5-ways-to-reduce-them-without-sacrificing-quality [4 Disember 2016]
Paul Simister, 2013, How to Reduce Fixed Costs,
http://businessdevelopmentadvice.com/blog/how-to-reduce-fixed-costs/ [4 Disember 2016]
Richard, 2016, 7 Tips for Amazon Sellers to Increase Sales, http://ecommerceplatforms.com/ecommerce-selling-advice/7-tips-for-amazon-sellers-to-increase-sales
[4 Disember 2016]

Paul Simister, 2013, How to Reduce Fixed Costs,

http://businessdevelopmentadvice.com/blog/how-to-reduce-fixed-costs/ [4 Disember 2016]

19

APPENDIX

20