C-V-P analysis

QUESTION ONE The Blake Manufacturing Corporation manufactures and sells folding umbrellas. The corporation’s condensed income statement for the year at 31 December 2011 follows:

Sales (200,000 units) £1,000,000 Cost of goods sold 600,000 Gross margin 400,000 Selling expenses £150,000 Administrative expenses 100,000 Net profit (before income taxes) £150,000

Blake’s budget committee has estimated the following changes for 2012: 30% increase in number of units sold 20% increase in material cost per unit 15% increase in direct labor cost per unit 10% increase in variable indirect cost per unit 5% increase in indirect fixed costs 8% increase in selling expenses, arising solely from increased volume 6% increase in administrative expenses, reflecting anticipated higher wage and supply price levels Any changes in administrative expenses caused solely by increased sales volume are considered immaterial. Because inventory qualities remain fairly constant, the budget committee considered that for budget purposes any change in inventory valuation can be ignored. The composition of the cost of a unit of finished product during 2011 for materials, direct labor and manufacturing support, respectively, was in the ratio or 3:2:1. In 2011, £40,000 of manufacturing support was for fixed costs. No changes in production methods or credit policies were contemplated for 2012. Review this unit’s readings and the above scenario. Blake has established a budgeted target profit of £200,000. There is a debate brewing within the management ranks of Blake regarding which strategies will put the company in best position to reach that objective. Blake CEO would like to adjust prices. The sales manager would like to focus on increasing the number of units sold while maintaining current prices. Your job is to provide an analysis aimed at helping to reach a decision. To begin this analysis: • Compute the unit sales price at which Blake must sell its product in the current year in order to earn a budgeted target profit of £200,000. • Calculate a value in response to the following: Unhappy about the prospect of a price increase, Blake’s sales manager would like data regarding the number of units that must be sold at the former price to earn the £200,000 profit. • Calculate a value in response to the following: Believing that an estimated increase in sales is overly optimistic, a company director is requesting data predicting annual profit if the selling price calculated above is adopted but the change in sales volume only amounts to a 10% increase.

QUESTION TWO The Final Project for this module is a consultancy report to Anthony’s Orchard, an expanding apple orchard and distributor. The company has been entertaining the idea of expanding its product line to include apple juice. In order to do this, a major investment in an apple press is needed. The aim of your consultancy report is to analyse all relevant data and make a recommendation to the management of the company in regard to this idea. Each of the remaining Individual Assignments in this module will focus on one component of this consultancy report; in Unit 6 you will compile these, complete your analysis and submit the Final Project. Measuring and regularly monitoring the financial health of a company, using budgeting and control methods, is a vital concern for managers. By acquiring and analysing timely and accurate financial data, decision-makers will have the tools to facilitate operational and strategic decisions. These decisions may concern reactions to business or environmental conditions, resource acquisition, expansion and more. This Individual Assignment will provide the opportunity to analyse financial data for Anthony’s Orchard. As you heard from company CEO Bob Frost in this unit’s media piece, Anthony’s Orchard would like to make aggressive plans for its future, including the expanded product offering described above. At the same time, unforeseen circumstances can impact the current health of the company as well as its future plans. What-if analyses are valuable aids in assessing a variety of planned and unplanned events. You will utilise the analysis you conduct here as part of the Final Project. To prepare for this Individual Assignment: 1. Review the readings and media for this unit, including the Anthony’s Orchard case study media. 2. Familiarise yourself with the Anthony’s Orchard company and its current situation; this can be done by exploring each of the tabs across the top of the screen in the Anthony’s Orchard case study media. Hint: You should focus on the financial information. To complete this Individual Assignment: 1. Review the Financial Statements: Analyse the current financial state of Anthony’s Orchard and evaluate the impact of a major customer cancelling their expected order. This analysis should include the following: o Your view of the current financial health of the company o Your assessment of the materials and labor costs o Your assessment of the income statement o Your assessment of the cash flow statement o Your assessment of each of the business units in Anthony’s Orchard o C-V-P analysis of the current year’s financials 2. Conduct a What-If Analysis: This what-if analysis concerns an unforeseen circumstance that could impact the company’s current health as well as its future plans. A major customer is considering cancelling their order for prepared apple products. This customer accounts for 25% of the prepared apple product revenue. Evaluate the impact of this on the budgeted statements contained in the case study.


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