Question

Identify and describe two areas or examples where the cost-volume-profit tools and analysis can be applied to either your personal experiences or your work experiences.

Answer 1

As per cost volume profit tools helps in identifying the profit levels at different sales volumes and cost, it determines the break even analysis (a no profit, no loss situation) for facilitating short term economic decisions. As per this concept the cost comprises of Fixed costs and variable costs , the fixed costs is constant at all volumes whereas, variable cost fluctuates with the volume.

Practical Scenarios

Scenario 1 Working with a CPA firm

A CPA firm charged its clients a rate of $1000 per client per hour, the cost of printing , brouchers, pens for client is $400 per client , the fixed cost of salaries of consultants and rent, insurance and utilities amounted to $150,000 per annum, the firm is curious to know what should be the number of clients where it will achieve a break even i.e. it will be able to recover the variable cost . Therefore, here the gross margin percentage (i.e. Revenue-variable cost or contribution as a percentage of sales) 100-40/100  i.e. 60 %, therefore , the break even will be when the contribution equates to the fixed cost .

Thus, 60% of consultancy revenue=$150000 (fixed cost)

$150000/60%= $250000.

Hence the firm anticipated approximately if atleast 250 clients arrive per annum it will be able to achieve a no profit no loss situation , anything above 250 clients will be a profitable situation for the firm.

Scenario 2 Working with a retail chain

A retail chain started the sale of a very new cereal for which it set up its own small cabin outside the store, the sale price for the cereal box was $20 per box, the variable cost $5 per box included wholesale price, packaging etc, the monthly rent of the cabin $3000 , the company wants to have a choice whether to continue with the retailing of this product or not , so as per the CVP analysis the break even boxes will be $3000 (fixed cost)/ selling price per box- variable cost per box= $3000/$20-$5 =200 boxes every month. Therefore, if the retailer is able to sell 200 boxes or more than that of cereal every month then it can continue, otherwise it should discontinue.