Question

CVP Modeling project Directions The purpose of this project is to give you experience creating a multiproduct profitability analysis that can be used to determine the effects of changing business conditions on the client's financial position. Your goal will be to use Excel in such a way that any changes to the assumptions will correctly ripple through the entire profitability analysis. You have been hired by Jake to build a CVP model that will help him understand the impact of business conditions on his operating income. (See "Starting File" worksheet). In your model, all of the original assumptions will be listed in one area of the spreadsheet (green box). All other calculations in the model will reference the assumptions (green box) such that if any assumption changes, the effect will ripple through the entire model. To accomplish this goal, you will use FORMULAS, rather than numbers in every other cell in the worksheet. In other words, the only place you will type numbers is the green assumptions box. Business Description FIRST TASK: Rename your Excel spreadsheet to your full name After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet supplies at trade shows. He has two products: Product 1: "Throw-it"- a tennis ball thrower that will sell for $15. FORMATTING conventions to use throughout project: - Round all UNITS to the nearest whole unit. Use the "decrease decimals" button on your tool bar rather than the Rounding function. - Show all MONETARY amounts as dollars and cents. Round to the nearest cent. (Sx.xx). Use the "decrease decimals" button rather than the Rounding function. - Show all percentages as %, not as decimals. (x%, not .xx) - Right justify all cells (numbers should be to the right side of the cell, not in the middle or left) Product 2: "Treat-it is an automatic treat dispenser that releases a treat when the dog places his paw on the pedal. The treat dispenser will sell for $40. 1) Complete the assumptions (green box) based on the data about Jake's business. Identify and list all variable costs separately and all fixed costs separately before finding the total for each type of cost. Costs: Jake has hired an employee to work the trade show booths. The work contract is $1,680 per month salary plus a commission equal to 10% of sales revenue. Jake will also spend $800 per month on trade-show entry fees. Jake is purchasing the products from a supplier in China. Throw-It cost $2.50 each; Treat-it-is cost $11 each. Shipping and handling on the Throw-its will cost $6 each; Shipping and handling on the Treat-It- Is, which are heavier, will cost $9 each. The shipping and handling costs will be paid by Jake, not the customer. 2) Complete the Product Analysis (pink boxes) assuming Jake ONLY sells either Product #1 (Throw-it) OR Product #2 (Treat-it-is). Check figures: B/E Product #1 = 496 units; B/E Product #2- 155 units Assume Jake expects to sell 600 Throw-its and 200 Treat-it-is during his first month of operations (June) 3) Complete the CM Income Statement for the month of June (yellow box). HINT: On product line income statements such as this, the fixed costs are only listed in the total column. Make sure you also show the totals for all other line items. Finally, calculate the overall W-A CM% for the company. Check figure: Net Operating Income = $3,720 W-A CM% = 36.47% Jake's financial goal is to earn a net operating income of $6,820 per month. He believes volume may grow at a rate of 6% a month. 4) Calculate the weighted average contribution margin (W-A CM) per unit in blue box). Check figure: W-A CM/unit = $7.75 5) Use the W-A CM/unit to calculate the TOTAL number of units needed to break-even (TOTAL column in the first orange box). THEN, calculate the number of EACH type of product needed to break-even. Finally, calculate the sales revenue associated with this volume for EACH product, and then the sales revenue to break-even in total. Check figures: B/E Product #1 = 240; B/E Product #2= 80 6) Use the W-A CM/unit to calculate the total number of units needed to achieve Jake's target profit (TOTAL column in the second orange box). THEN, calculate the number of EACH type of product needed to achieve the target profit. Finally, calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total. Check figures: B/E Product #1 =900; B/E Product #2= 300 7) Calculate the Margin of Safety (MOS) using June sales as the expected sales (purple box). Calculate the MOS in terms of sales revenue and as a percentage. Also calculate the current degree of operating leverage (round to the nearest 2 decimal places) and use it to determine the expected percentage change in net operating income stemming from an expected change in sales volume. Check figures: MOS%= 60%; Degree of Operating Leverage = 1.67 8) Make sure you have cleaned up your worksheet using the formatting conventions listed above. 9) Submit your file through Canvas by 11:59 PM on March 1, 2020.

Answer 1

From the information given above,I have computed the following

2 15 1680 800 2480 1.5 6820 2.5 6% 1 1. Information given and variable cost per unit for each product & fixed costs Assumptions 3 Product 1 Throw-it Fixed costs per month 4 Sales price per unit Salary per month 5 Trade show entry fees 6 Variable costs per unit Total Fixed costs per month 7 Sales Commission 10% on sales revenue 8 (15*10%=1.5) Target profit per month 9 Throw-it purchase cost per unit 10 Shipping & Handling cost per unit Expected change in volume(%) 11 Total Variable cost per unit 10 12 13 Monthly Volume 600 units 14 15 Product 2 Treat-it-is 16 Sales price per unit 40 17 18 Variable costs per unit 19 Sales Commission 10% on sales revenue 20 (40*10%=4) 21 Treat-it-is purchase cost per unit 11 22 Shipping & Handling cost per unit 23 Total Variable cost per unit 24 200 units 25 Monthly Volume 26

1 2.Product Analysis assuming Jake only sells either product 1 or product 2 Throw-it Treat-it-is 16 40.00% 15 33.33% 1.5 3 Product 1 4 Unit Contribution margin 5 Contribution margin% Unit Contribution margin 7 Sales price (5/15)*100=33.33% 9 Break even point 10 in units 11 Fixed cost/Unit Contribution margin 12 2480/5-496 units Product 2 Unit Contribution margin Contribution margin% Unit Contribution margin Sales price (16/40) *100-40% Break even point in units Fixed cost/Unit Contribution margin 2480/16=155 units Workings Throw-it Sales price per unit Less: Variable costs per unit Sales Commission 10% on sales reve (15*10%=1.5) Throw-it purchase cost per unit | Shipping & Handling cost per unit Total Variable cost per unit Unit Contribution margin(15-10) (sales - variable cost) 2.5 496 units 155 units 6 10 13 7440 6200 14 in sales revenue(units sales price) 15 496units*15=7440 in sales revenue(units sales price) 155units 40=6200 16 581 units 17 Target profit volume 18 in units 1860 units 19 (Fixed cost+target profit)/Unit Contribution margin 20 (2480+6820)/5=1860 units Target profit volume in units (Fixed cost+target profit/Unit Contribution margin (2480+6820)/16=581 units Treat-it-is Sales price per unit 40 Less: Variable costs per unit Sales Commission 10% on sales revel 4 (40*10%-4) Throw-it purchase cost per unit 11 Shipping & Handling cost per unit 19 Total Variable cost per unit Unit Contribution margin(40-24) 16 (sales - variable cost) 21 27900 23240 in sales revenue(units sales price) 581units*40=23240 22 in sales revenue(units* sales price) 23 1860 units 15-27900 24 25

Overall W A Contribution Margin % for the company using information from the Income Statement Product 2 Total 17000 36.47 8000 (200*40) Contribution margin Sales Revenue 6200 17000 2 3.Income Statement for the month of June 3 4 Particulars Product 1 5 Sales Revenue 9000 (600*15) 7 Less: Variable costs per unit 8 Sales Commission 10% on sales revenue 900 9 (600*1.5) 10 Throw-it purchase cost 1500 11 (600*2.5) 1700 800 (200*4) 2200 (200*11) 3700 12 1800 5400 (200*9) 3600 (600*6) 6000 3000 4800 10800 3200 6200 13 Shipping & Handling 14 15 Total Variable cost 16 Contribution Margin 17 18 Fixed costs 19 Salary per month 20 Trade show entry fees 21 Total Fixed costs per month 22 Net operating income 1680 800 2480 3720 23 24 Overall W A Contribution Margin % 36.47% 25

6.Multi product Target Profit 4. Calculation of Weighted average contribution margin per unit using information from the Income Statement Multi product Target Profit Fixed cost+Target profit Unit Contribution margin 1200 units 2480+6820 7.75 Product 1 Product 2 Total WA contribution margin per unit: Contribution margin Sales units W-A CM/unit 3000 3200 5200 Total 200 200 800 7.75 Sales in units ratio 1200 units 1200 Product 1 Product 2 600 31 900 300 (1200*3)/4) 13200*1)/4) 15 13500 12000 (900*15) (300*40) 5.Multi product Break Even point 40 Sales price Sales reveune 25500 Break Even point: Fixed cost Unit Contribution margin 320 units 2480 7.75 Product 2 Total Product 1 600 200 Sales in units ratio 320 units 3 80 320 240 (320*3)/4) Sales price Sales reveune (320*1/4) 40 3200 (80*40) 5800 3600 (240*15)

Margin of Safety= Total Sales - Breakeven Sales

=17000-6800= 10200

Margin of Safety %= Margin of safety sales/Total Sales *100

= 10200/17000=60%

Operating Leverage = Contribution margin/net operating income

=6200/3720=1.67

Expected % change in operating income= Operating leverage* expected % change in volume(given in problem =6%)

= 1.67*^6%=10.02%.