This module describes how cost-profit-volume (CVP) analysis can be used to perform break-even analysis

How cost-profit-volume (CVP) analysis can be used to perform break-even analysis

Consider a company that produces two hundred different products. Due to mass production, management might lose sight of a product. If that product becomes unprofitable, the company will lose money on every sale of that product. This might lead to repercussions such as increasing the sales price of the product, cut its production cost, or discontinue its production.

This could be the scenario with all the different products.Typically, a company produces variant product lines that generate revenue. Many companies start at a small scale, grow over time with the addition of new products, and develop new markets. At a certain stage of growth, every company needs to analyze whether its existing products or the addition of new products will prove profitable or add any value to its shareholder value.  Therefore, to sustain profitability and build a business with profitable products, managers need to do operational planning and make decisions based on predictions of costs and revenues.

This module describes how cost-profit-volume (CVP) analysis can be used to perform break-even analysis—a critical tool essential for determining profit margins.

Module Readings:

 

Complete the following readings early in the module:

Read the online lectures for the Module

From the textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making, 5th, read the following chapters:

Chapter 9: Accounting and Information Systems

Chapter 9 textbook Microsoft PowerPoint slides

 

Chapter 13: Overhead Allocation Decisions

Chapter 13 textbook Microsoft PowerPoint slides

 

Chapter 14: Strategic Investment Decisions

Chapter 14 textbook Microsoft PowerPoint slides

Assignment: OAES Entry

Instructions:

“Save” your response to each question by changing the color to the answer to RED as you work through the assignment

Question 1 (3 points)

Q9-1: Information systems that include both financial and non-financial information which can be presented graphically with highlighting of performance relative to target are:

Question Answer Options: Choose one

Enterprise resource planning systems

Expert systems

Transaction processing systems

Management information systems

Question 2 (3 points)

Q9-2: Information systems that integrate financial and non-financial information and provide holistic information across multiple business activities are:

Answer Options: Choose One

Enterprise resource planning systems

Expert systems

Management information systems

Transaction processing systems

Question 3 (3 points)

Q9-3: Reporting on a horizontal perspective provides information about:

Answer Options: Choose One

an organization’s structure of departments or business units

business activities or processes that cut across departments or business units

an organization’s structure of processes

an organization’s processes reflected in its organization chart

Question 4 (3 points)

Q9-4: Information systems design and control is important:

Answer Options: Choose One

For all new and existing systems

For all systems except those by established suppliers such as SAP and Oracle

Only for accounting systems

Only for new information systems

Question 5 (5 points)

Q13-1: Williams, a professional services firm has overhead of £625,000. It operates three divisions and an accountant’s estimate of the overhead allocation per division is 38% for Division 1, 22% for Division 2 and 40% for Division 3. The divisions respectively bill 4,100, 1,950 and 3,300 hours.

The business-wide overhead recovery rate and the cost-centre overhead recovery rate for Division 2 are, respectively:

Answer Options: Choose One

£57.93 and £72.51

£66.84 and £70.51

£55.55 and £62.50

£62.50 and £55.55

Question 6 (9 points)

Q13-2: Randy’s Components uses an activity based costing system for its product costing. For the last quarter, the following data relates to costs, output volume and cost drivers:

Overhead Costs                   £

Machinery                              172,000

Set-ups                                     75,000

Materials Handling            25,000

Total                                           272,000

Product information                                      A               B            C

Production and sales units                     5,000   3,500   2,800

Number of production runs                      11             9             6

Number of stores orders                           15            10            9

Question Answer Options: Choose & Match

Product A

Product B

Product C

1. £8.65

2. £8.24

3. £9.27

Question 7 (3 points)

Q13-3: The method of determining overhead allocation using absorption costing and that under activity-based costing differs because:

Question Answer Options: Choose One

Activity-based costing allocates costs to cost pools and traces costs to products based on cost drivers whereas absorption costing allocates costs to cost centres and then to products based on a measure of activity such as direct labour hours

Absorption costing allocates costs to cost pools and traces costs to products based on cost drivers whereas activity-based costing allocates costs to cost centres and then to products based on a measure of activity such as direct labour hours

Absorption costing is based on a business-wide allocation of overheads whereas activity-based costing is based on a departmental (or cost centre) allocation of overheads

Activity-based costing can never accurately allocate overheads to products because the method of allocation is arbitrary whereas absorption costing is always more reliable because it uses predictable causes of overhead costs to trace those costs to products

Question 8 (3 points)

Q13-4: The main proposal made by Cooper & Kaplan in their article “How cost accounting distorts product costs” is that

Question Answer Options: Choose One

nearly all product costs are variable and cost systems need to reflect the variability of these costs in terms of the number of transactions

cost accounting has not reflected the shift from manufacturing to service industries

product cost information can lead to inappropriate decisions about product discontinuance

product costs that are calculated for inventory valuation purposes are not reliable for decision-making

Question 9 (8 points)

Q14-1a: The projected net cash flows for an investment are (in £’000):

Y0: ?

Y1: 130

Y2: 200

Y3: 330

Y4: 270

Y5: 180

Match the net present value of the investment assuming a 7% cost of capital and a 950 initial investment; a 8% cost of capital and a 850 initial investment; a 9% cost of capital and a 825 initial investment; and a 6% cost of capital and a 900 initial investment?

Question Answer Options: Choose One & Match

8%/850

9%/825

7%/950

6%/900

1. -50.1

2. 24.8

3. 25.7

4. 26.1

Question 10 (3 points)

Q14-1b: Given the cash flow in the prior question (14a) and for the $900 initial investment, what is the IRR of the cash flows?

Question Answer Options: Choose One

7%

9%

8%

6%

Question 11 (7 points)

Q14-2: General Sales is considering three alternative investment proposals but can only accept one of these. The investments and cash flows are shown below:

Year 0        Year 1        Year 2         Year 3          Year 4

Project A

Cost of Capital            12%

Cash inflows             -150,000    50,000         75,000       75,000        50,000

 

Project B

Cost of Capital           11%

Cash inflows              -200,000     75,000        75,000        75,000        75,000

 

Project C

Cost of Capital            10%

Cash inflows              -265,000    50,000        100,000       150,000     100,000

General uses discounted cash flow techniques to evaluate its investments, using a cost of capital as specified above.  Compare for each alternative investment the Net present value, Profitability index, and the Internal rate of return. Which of the three investment proposals is the best for General Sales?

Question Answer Options: Choose One

Project A

Project C

Project B

None of them have positive NPVs and are not acceptable.

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