Question

CVP Modeling project 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. If executed properly, the client should be able to use this spreadsheet over and over, using different "what if" assumptions. Business Description 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: "Launch-it"- a tennis ball thrower that will sell for $25. Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the dog places his paw on the pedal. The treat dispenser will sell for $30. Costs: Jake has hired an employee to work the trade show booths. The work contract is $1,200 per month plus a commission equal to 10% of revenue. Jake will also spend $700 per month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico. Launch-its cost $2 each; Treat-times cost $6 each. Shipping and handling on the Launch-its will cost $4 each; Shipping and handling on the Treat-times, which are heavier, will cost $7 each. The shipping and handling costs will be paid by Jake, not the customer. Assume Jake expects to sell 225 Launch-its and 175 Treat-times during his first month of operations (June). Jake's financial goal is to earn an operating income of $8,000 per month. He believes volume may grow at a rate of 5% a month.

Answer 1

Solution:

2 Assumptions Product #1 Launch-it Sales Price Per Unit 25 Variable Costs per unit Cost from Mexico Shipping Cost Sales Commission (10% of Rey 2.5 Total Variable Costs 8.5 Contribution Margin 16.5 Monthly Volume 225 4 Product #1 Treat-Time Sales Price Per Unit 30 Variable Costs per unit Cost from Mexico 6 Shipping Cost 7 Sales Commission (10% of Rev 3 Total Variable Costs 16 Contribution Margin 14 Monthly Volume 175 Fixed Costs per month Employee Cost Trade Show entry Fees Total Fixed Cost 1200 700 1900

Launch It 16.5 66% Product #1 Unit CM CM% (16.5/25) Breakeven point - in units (1900/16.5) - in sales revenue (115*25) 115 2879 Target Profit Volume - in units (1900+8000)/16.5 - in Sales Revenue 600.00 15000 Treat-Time 14 47% Product #2 Unit CM CM% (14/30) Breakeven point - in units (1900/14) - in sales revenue 136 4071 Target Profit Volume - in units (1900+8000)/14 - in Sales Revenue 779 23357 Formulae Break Even Point (Units) =Fixed Cost / CM per units Break Even Point (Sales) =Fixed Costs / CM% Target Profit Volume - Units =(Fixed Cost +Target Profit)/ CM per unit Target Profit Volume - Sales =(Fixed Cost +Target Profit)/CM%

Jakes Pet Supplies ProForma Margin Income Statement For the month ending June 30 Product #1 Product #2 Total Sales 5625 5250 10875 Less: Variable Costs 1912.5 2800 4712.5 Contribution Margin 3712.5 2450 6162.5 Less: Fixed Cost 1900 Net Income 4262.5 WACM% 37% 26% 57% Calculation of Weighted Average CM per Unit Product #1 Product #2 Total Sales 5625 5250 10875 Less: Variable costs 1913 2800 4713 Contribution Margin 3713 2450 6163 WACM per unit 15 Multiproduct Breakeven point - in units - Sales Revenue at Break Even Product #1 Product #2 Total 69 54 123 1734 1619 3353 Multiproduct Target point profit Product #1 Product #2 Total - in units 310 708 - Sales Revenue at Break Even 3980 13266 398 9286 Margin of Safety 7522 Margin of Safety % 69% Operating Leverage Factor 1.45

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