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Strategic cost analysis & management:
Case StudyBill French Accountant
Takeaways
Bill French, aggregated BEPbasic basic+ dividend
basic+ union
+ dividend + union
Sales volume 1 076 406 1 328 688 1 189 275 1 470 093
Unit sales price 1,159 1,159 1,159 1,159(+) Sales revenue 1 247 400 1 539 760 1 378 200 1 701 216
Unit var. cost 0,56 0,56 0,62 0,62
(-) Total VC 607 401 749 760 738 200 911 216 (=) Contribution margin 640 000 790 000 640 000 790 000
(-) Fixed cost 640 000 640 000 640 000 640 000 (=) Operating profit 0 150 000 0 150 000
(-) Taxes 0 75 000 0 75 000 (=) Net Profit after taxes 0 75 000 0 75 000
Dividends 0 75 000 0 75 000 (=) Net Profit 0 0 0 0
Bill French, line-by-line BEP basic basic+ union
Sales volume at aggregated BEP 1 076 406 1 189 275
BEP A (in units)170 000/0,42= 404 762
170 000/0,30 = 576 271
BEP B (in units)275 000/0,88 = 314 286
275 000 / 0,81 = 338 462
BEP C (in units)195 000/0,55 = 354 545
195 000/0,53 = 371 429
basic + dividend + union +dividend +
union
Sales volume 1 160 500 1 412 783 1 282 188 1 560 924
Unit sales price 1,159 1,159 1,159 1,159(+) Sales revenue 1 344 854 1 637 214 1 485 873 1 808 888
Unit var. cost 0,56 0,56 0,62 0,62
(-) Total VC 654 854 797 213 795 872 968 888 (=) Contribution margin 690 000 840 000 690 000 840 000
(-) Fixed cost 640 000 640 000 640 000 640 000 (=) Operating profit 50 000 200 000 50 000 200 000
(-) Taxes 25 000 100 000 25 000 100 000 (=) Net Profit after taxes 25 000 100 000 25 000 100 000
Dividends 0 75 000 0 75 000 (=) Net Profit 25 000 25 000 25 000 25 000
Bill French, aggregated CVP calculations
Learning Objective 1
Using cost behavior information to compute an organization breakeven sales level for a multi-products firm
CVP analysis for Multiple Products
BEPagregated ≠ BEPP1+BEPP2+BEPP3
Many sales combinations leading to the BEPAn extension of basic CVP analysis allows to continue to use its basic profit equation and graphing techniques by developing a weighted average product (‘the super product’) based on the estimated sales mix.This breakeven calculation will remain valid as long as the sales mix remains constant.
How to compute BEP in multi-production contexts
Define the assumed sales mix (P1 % of total sales, P2 % of total sales, P3 % of total sales)Calculate the weighted unit contribution margin (%salesP1 x UCMP1)+ (%salesP2 x UCMP2)+ (%salesP3 x UCMP3)BEP (unit) = Total FC ÷ weighted UCMBEP ($) = Total FC ÷ weighted UCM rate
!!! Weighted UCM rate = weighted UCM ÷ weighted turnover (and NOT weighted (UCM ÷ turnover))
Learning Objective 2
Using CVP in decision-making
The use of break-even analysis
BEP gives a measure of risk, not of profitability.BEP enables to assess the degree of risk of a company’s cost structure.A planning tool, useful to forecastfinancial needs.
CVP analysis is not for “discontinuing” decisions… a negative/positive UCM is not the onlyrelevant criteria to decide whether or not to drop a product.CVP analysis is insufficient for discontinuingdecisions (outsourcing, change in the productportfolio, …):Need to know the nature of fixed costs(direct/indirect)What are direct –avoidable- versus indirect –largely unavoidable- costs?
CVP analysis is not for comparing products
Basic UCMs usually do not tell us which products should be pushedContrary to UCMs, unit contribution margins per unit of scarce resource are not misleadingUCMs may be used when all products have the same scarce resource’s consumption.
Line-by-line versus aggregate analysis
Line-by- line analysis tells us about virtual profitability for each product. From manufacturing and sales point of view, it is very useful to make planning for each product.
Aggregate analysis answers whether we canmeet our profit targets.From the financial point of view, it is very useful to target the aggregate profit level.Focus on net profit rather than operating profit.