ACC550 M1CVPA Milestone 1 PDF

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Grade A The New Hampshire Company part 1...

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ACC 550 Milestone: 1

Cost-Volume-Profit Analysis Sophia Gomes ACC 550 Milestone 1

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ACC 550 Milestone: 1 Cost-Volume-Profit Analysis (CVP) This project focused on the fictional Hampshire Company and how CVP analysis is used as a tool for short-term economic planning. CVP analysis is defined as “Examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product.” (Datar & Rajan, 2018) It’s important to note that to use CVP accurately all of the following must be true, “Revenue and cost changes occur only when the number of goods and/or services produced or sold are changed. Total costs can be broken down into a fixed component and does not change as production volume increases. Total revenue and total costs share a linear relationship with volume production. Selling prices and unit variable cost and fixed costs are constants. Analysis refer either to a single product, being assumed that the proportion of different products in total will remain constant as change in the total number of units sold; all revenues and costs can be aggregated and compared without taking into account the time value of money.” (Busan; Dina, p.106) Short-Term Planning Cost-Volume-Profit Analysis is a method by which administrators are able to identify changes in a variety of variables one needs to take tally of including but not limited to sales volume, fixed costs, variable costs, and operating income. This is an important tool when estimating cost behaviors, break even points, margins of safety, and operating leverage. These variables can make or break a company. Contribution margins inform management of how much revenue is left over to cover the overhead or fixed costs. The breakeven point will determine if the company is making a profit or incurring a loss from their production output. The margin of safety shows how much of a windfall you can take before incurring loss or in other words the

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ACC 550 Milestone: 1 margin before loss. When all of this comes together a company can analysis the position of their current production outlook or run the numbers to decide if they should pick up or deny a prospective project. For Requirement 8 we wanted to see if the Hampshire Company should produce 5,000 custom umbrellas for an English Touring company. The touring company would pay $11 an umbrella and the variable and fixed costs increased. Once we recalculated the expected profits and subtracted the costs we saw that there would be $9,000 in net profits making this project worth pursuing. To see the calculations please refer to Requirement 8 of the attached excel sheet labeled AAC550_SGomes_Section1_CVPA. Break Even The Hampshire Company made and sold 60,000 umbrellas. The breakeven point for the sale of umbrellas is 45,465 umbrellas. The company has a Margin of safety of 14,535 umbrellas. In the same vein, the breakeven point for sales is $568,317 and the company is pulling in $750,000. From this information we can tell that The Hampshire Company is able to pay its fixed costs and create a profit of $94,475 for the company. Planning CVP is an important tool that is used to make well-informed business decisions. Of the analysis techniques, Cost-Volume-Profit Analysis provides the reviewer with a deeper understanding of how the details affect business goals. It’s one of the best ways for a company to predict how decisions will affect the future of the business and its financial health. It also lets them set accurate and achievable goals in terms of increasing production or hitting profit margins. In the case of the breakeven point, CVP helps the company predict whether their production and spending will set the company up for success or doom them to failure.

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ACC 550 Milestone: 1 References: Busan, G., & Dina, C.I. (2009). Using Cost-Volume-Profit Analysis in Decision Making. Annals of the University of Petrosani, Economics, 9(3), 103-106

Datar, S., M Rajan, M. (2018). Horngren’s Cost Accounting: A Managerial Emphasis, 16th Ed. Pearson.

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