Question

Cost-Volume-Profit Analysis

Suppose you have decided to start a business producing and selling a product of your choice from the following options: custom birthday cakes, lawn mowers or sport jackets.

For your essay, answer the following questions related to your product:

• Briefly describe the product you would produce and sell. What market will you target this product for? At what price would you sell your product? Make a projection of your sales in units for the first year of operations.
• Make a detailed list of the materials needed to make your product. (Use the textbook and/or outside research as necessary.) How much in materials will you need for the year? What is the cost of these materials?
• Make a list of expenses you would incur in your business venture. (Use the textbook and/or outside research as necessary.) Examples include rent, utilities, insurance, direct labor, manufacturing overhead costs and so on. Estimate the cost of each of these expenses per year.
• Classify all of your expenses as either fixed or variable, and calculate how many units of your product you would need to sell to break even.
• How much operating income would you like to earn in the first year? Calculate how many units you would need to sell to meet your target profit.
• How realistic is your potential venture? Do you think your target profit is achievable? Explain.

Answer 1

ANSWER:-

Suppose we sell sports jacket. The cost of each Jacket is comprised of the following: Selling price of $1,000 and variable (flexible) cost of $400(Direct Labor 150, Direct Material 120, other variable cost 130). Total fixed (capacity-related) costs for Shop are $90,000. (Includes Rent 35,000, Utilities 25,000, Insurance 10,000, other fixed cost 20,000)

What is the payment margin per dress?                                                                          Revenues – Flexible Costs = CM

$1,000 - $400 = $600

Suppose we sold 200 jackets as target.

1. What is the Shop total profit when 200 Jackets are selling?

          Revenues – Flexible Costs – Capacity-Related Costs = Total Profit

200 ($1,000) – 200($400) - $90,000 = $30,000

1. How many Jackets must Shop sell to reach the manage point?           

X = Capacity-Related Costs/Contribution Margin

X = $90,000/$600=150

    X = 150 Jackets

1. How many Jackets must Shop sell to yield a profit of $60,000?

Total Revenues – Total Costs = Total Profit

$1,000X - $400X - $90,000 = $60,000

$600X = $150,000

X = $150,000/$600=250

X = 250 Jackets

The venture is realistic in nature and we can achieve the target profits if we plan and implement the actual planning.

Target Profit is 60,000 as seen in last working note.

We have to keep the price in competition of market.

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