Air Land Transport, Inc., a freight forwarding company with more than 50 locations throughout the United States, is considering expansion into a new market. As a first step in the decision-making process, ALTI’s CEO has asked for estimates on sales volumes required from ALTI’s multiple product lines required to achieve break even and to achieve a certain target operating income.
So here we will be looking at different ways of using a CVP analysis in order to make decisions
Cost - Cost is is the unit price to make a product or provide a service.
Volume - it is quantity of production
Profit - Sales - cost which will result in operating profit
Cost-volume-profit (CVP) analysis helps managers make many important business decisions such as what products and services to offer.An accounting analyst for a logistics company is asked to determine whether a possible expansion into a new geographic market can achieve management’s required financial goals.
ALTI :
ALTI started its operations from a single office with just one employee and no clients, to a national company with more than 50 offices, 500 employees and $250,000,000 in revenues. ALTI grew by specializing in the shipment of unusual, time-sensitive freight with special shipping requirements that major freight carriers couldn’t handle well in their large, monolithic shipping systems such as sensitive electronic equipment and high-value medical products.
The freight forwarders were not given the ownership of the trucks but instead they d[pend on trucking and air shipment Companies like ALTI to transport their goods.
ALTI decided to expand its operation worldwide and it has appointed a analyst in analyzing the cost estimates. The analyst based on his accounting expertise has made a proper investigation the business process and how feasible it is to expand the operations. Their first focus was on expanding the operations to Nashville.
The analyst with a proposed pricing list for Factor Medical and estimated monthly shipping volumes, has suggested the following:
The pricing for Factor Medical would not change for the first two years, but that Factor expected a 15% increase in shipping volume in their second year of operations. There could be a lock in prices with ALTI’s Nashville trucking and air cargo vendors for two years, but the costs of operating the new office would increase approximately 2% each year. With all of this data, CEO needed to determine whether ALTI could breakeven in their first year of operations in Nashville, and whether ALTI could make the required $50,000 of operating income in year 2
First calculate the Contribution margin which is nothing but sales - variable cost
Then , Contribution margin multiplied with the sales mix will provide the weighted contribution margin
The average of the contribution margin over the period will give weighted average contribution margin. With the computation of the weighted-average contribution margin, the denominator of the CVP break even formula has been identified. The instructor can the lead a discussion about the total fixed costs of the Nashville operation which belong in the numerator of the formula.
Then once fixed cost is identified and annualized, the CVP break even point will be identified:
CVP break even point = fixed cost/ Weighted average contribution margin
Finally, Margin of safety - Annual CVP will provide the projected annual loss or gain for the year.
Hence when there is a potential amount of loss involved the it is suggested that the expansion should not be made in year . Based on the financial and qualitative factors, the financial position increases the break even and the sales volume only by a small amount, then it is advised to hold on to the decision of expansion into Nashville.
Subject: Please read the instructions carefully. You learned that cost volume profit analysis is used to...
Find a numerical example of cost-volume-profit (CVP) analysis, and analyze how CVP analysis is used for decision making?
Find a numerical example of cost-volume-profit (CVP) analysis, and analyze how CVP analysis is used for decision making?
Cost-volume-profit analysis (CPV) can be used by management to better understand the relationships between the company’s costs, sales volume, and profit. Cost-volume-profit analysis can be used to evaluate the effects on profit when companies make changes in selling prices, service fees, costs, income-tax rates, and the organization’s mix of products or services. CVP analysis provides management with a comprehensive overview of the effects on revenue and costs, allowing them to implement financial changes and track outcomes. Managers in nonprofit organizations,...
The cost volume profit analysis, commonly referred to as CVP, is a planning process that management uses to predict the future volume of activity, costs incurred, sales made, and profits received. In other words, it’s a mathematical equation that computes how changes in costs and sales will affect income in future periods (Peavler, 2019). CVP analysis provides managers with the advantage of being able to answer specific questions needed in business analysis. Such as, what is the company's breakeven point?...
What is the answer to number 5?? Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel Using the High-Low Method to Estimate Variable and Fixed Costs Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the...
cost volume profit analysis The Woodcraft Company produces thin limestone sheets that are used for the facings on buildings. As can be seen in the contribution margin statement, last year the company had a net profit of S157 500, based on sales of 1800 tonnes. The manufacturing capacity of the firm's facilities is 3000 tonnes per year Woodcraft Company Contribution Margin Statement Year ded 31 December $900 000 Sales Variable costs Manufacturing Selling costs Total variable costs Contribution margin Fixed...
Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel Using the High-Low Method to Estimate Variable and Fixed Costs Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes,...
Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel Using the High-Low Method to Estimate Variable and Fixed Costs Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of the canoes,...
Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel Using the High-Low Method to Estimate Variable and Fixed Costs Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20X1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of...
Integrative Exercise Cost Behavior and Cost-Volume-Profit Analysis for Many Glacier Hotel Using the High-Low Method to Estimate Variable and Fixed Costs Located on Swiftcurrent Lake in Glacier National Park, Many Glacier Hotel was built in 1915 by the Great Northern Railway. In an effort to supplement its lodging revenue, the hotel decided in 20x1 to begin manufacturing and selling small wooden canoes decorated with symbols hand painted by Native Americans living near the park. Due to the great success of...