Report: Cost-Volume-Profit Analysis for XYZ Company

Cost-Volume-Profit Analysis Introduction Cost-Sales-Profit (CVP) analysis is an important tool for businesses to understand the relationship between costs, sales and profit. In this article, we will conduct CVP analysis of Deals and Deals Ltd using the data provided. The analysis will include total sales, sales revenue, and interest. We also discuss how CVP analysis can help managers make decisions and see their limitations. 1) Total revenue from a product To calculate the total revenue from a product, we first need to define each product. The joint venture is the difference between the selling price of the unit and the spread of the unit. We then divide the result by the sales volume of each product to find the total profit. For the Standard Dash Camera: Total Contribution = (£20 – £12) × 2000 = (£8) × 2000 = £16,000   For the Dual lens Dash Camera: Total Contribution = (£30 – £18) × 3000 = (£12) × 3000 = £36,000   For the Smart Dash Camera: Total Contribution = (£45 – £25) × 1500 = (£20) × 1500 = £30,000   2) Breakeven Sales Revenue   To calculate the income from sales, we first need to determine the income. The profit calculation formula is as follows:   Profit = (unit sales price – unit variable cost)/unit product sales price   Let’s calculate the profit from all products: For the Standard Dash Camera: Contribution Margin Ratio = (20 – 12) / 20 = 8 / 20 = 0.4   For the Dual lens Dash Camera: Contribution Margin Ratio = (30 – 18) / 30 = 12 / 30 = 0.4   For the Smart Dash Camera: Contribution Margin Ratio = (45 – 25) / 45 = 20 / 45 = 0.444 (rounded to three decimal places)   We can now calculate net sales revenue using the following formula:   Net Sales Revenue = Total Expenses / Net Income Given that the total fixed costs are £30,000 per annum, we can use this information to calculate the breakeven sales revenue for each product:   For the Standard Dash Camera: Breakeven Sales Revenue = £30,000 / 0.4 = £75,000   For the Dual lens Dash Camera: Breakeven Sales Revenue = £30,000 / 0.4 = £75,000   For the Smart Dash Camera: Breakeven Sales Revenue = £30,000 / 0.444 ≈ £67,568.97 (rounded to two decimal places)   Therefore, the breakeven sales revenue for each product is as follows:   Standard Dash Camera: £75,000 Dual lens Dash Camera: £75,000 Smart Dash Camera: £67,568.97 (rounded to two decimal places)   3) Margin of Safety The margin of safety measures how much sales can fall before the company reaches its break-even point. It can be calculated with numbers and percentages. Margin of safety (amount) = Actual sales – Breakeven sales revenue Margin of safety (percentage) = (Margin of safety amount / Actual sales) * 100   To calculate the margin of safety, we first need to determine the breakeven sales revenue for each product, as we’ve already done in question 2. Then, we can use the actual sales revenue for each product to find the margin of safety.   Given the sales units and selling price per unit for each product, we can calculate the actual sales revenue for each product as follows:   Standard Dash Camera: Actual Sales Revenue = Sales Units * Selling price per unit = 2000 * £20 = £40,000   Dual lens Dash Camera: Actual Sales Revenue = Sales Units * Selling price per unit = 3000 * £30 = £90,000   Smart Dash Camera: Actual Sales Revenue = Sales Units * Selling price per unit = 1500 * £45 = £67,500   Now, let’s calculate the margin of safety for each product:   For the Standard Dash Camera: Margin of safety = Profit on sales – Equal profit and loss = £40,000 – £75,000 = -£35,000   For the Dual lens Dash Camera: Margin of safety = Profit on sales – Equal profit and loss = £90,000 – £75,000 = £15,000   For the Smart Dash Camera: Margin of safety = Profit on sales – Equal profit and loss = £67,500 – £67,568.97 ≈ -£68.97 (rounded to two decimal places)   The negative margin of safety for the Standard Dash Camera indicates that the actual sales revenue is below the breakeven sales revenue, meaning that the company is operating at a loss for this product.   For the Dual lens Dash Camera, the positive margin of safety indicates that the actual sales revenue exceeds the breakeven sales revenue, indicating a profit.   Similarly, the negative margin of safety for the Smart Dash Camera suggests that the actual sales revenue is slightly below the breakeven sales revenue, resulting in a loss.   The margin of safety percentage can be calculated as a percentage by dividing the margin of safety by actual sales revenue and dividing by 100. However, the safety percentage will not be useful in this case due to the negative results obtained with standard tachographs and devices. smart tachographs   4) How CVP Analysis Helps Managers to Make Decisions CVP analysis provides managers with valuable insights into various aspects of business operations:  

• Determining the price: By understanding the benefits of each product, managers can establish appropriate prices to achieve the desired results.
• Sales mix decisions: Managers can analyse the contribution margin of different products and adjust the sales mix to maximize overall profitability.
• Budgeting and forecasting: CVP analysis helps in setting realistic sales targets and budget allocations based on the expected contribution margin.
• Cost management: By identifying competition and security, managers can evaluate the impact of price changes on profits and implement cost measures.

5) Limitations of CVP Analysis While CVP analysis is a useful tool, it has some limitations:

• Assumption of Linearity: CVP analysis assumes a positive relationship between costs and revenues, which may not be the case in the real world.
• Other factors are not taken into account: CVP analysis does not take into account other factors such as changes in the business, competition and industry that can affect sales and price.
• Limited applicability to complex businesses: CVP analysis may oversimplify the dynamics of complex businesses with multiple products, markets, and cost structures.
• Reliance on historical data: CVP analysis relies on historical data for cost and revenue estimates, which may not accurately reflect future business conditions.

Conclusion In summary, CVP analysis is an important tool for businesses to understand the relationship between costs, sales volume and profit. By calculating each product’s gross margin, sales revenue, and margin of safety, managers can make informed decisions about pricing, sales mix, budget used, and forecasts. However, it is important to be aware of the limitations of CVP analysis, including the line of thought, other limited use challenges for businesses, and the reliance on historical data. References:

• Horngren, C.T., Datar, S.M., Rajan, M.V. (2012). Fees: Admin Approval. Pearson Education.
• Hilton, R.W., Maher, M.W., Selto, F.H. (2019). Cost Management: A Business Decision. McGraw-Hill Education.

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