I have attached an excel with most of the computations complete.

Module 2 – Case

Cost–Volume–Profit Analysis

Assignment Overview

The Annie Smith Dance Center

The Director of Annie Smith Dance Center is asking for assistance with the financial aspects of running a professional group of performers. She wants financial information presented in an easy to read format and a better understanding of the profitability of the concerts and the organization as a whole.

The Annie Smith professional group features three styles of dance concerts each year. Two of the dance concerts showcase a different genre. The third performance is a Christmas Spectacular, which is the most popular and is therefore scheduled every year. The table below provides information about expected ticket sales for the performances.

	Lower Orchestra Section (A)			Upper Orchestra Section (B)
Descriptions	No. of Seats.	Ticket Price	Tickets sold per performance	No. of seats	Ticket Price	Tickets sold per performance
Hip-Hop Performance	150	$85	100%	450	$50	90%
Jazz and Tap Dance	150	$85	100%	450	$50	60%
Christmas Spectacular	150	$125	100%	450	$50	100%

Ms. Smith has prepared a tentative schedule for the coming season. The table below also shows the type and number of performances and direct cost per type of concert.

Descriptions	Number of Performances	Cost per Dance Concert (direct fixed costs)*
Hip-Hop Concert	10	$48,000
Jazz and Tap Dance	5	86,000
Christmas Spectacular	20	22,000
Total Direct Fixed Costs		$156,000

*Examples of direct fixed costs are costumes, rehearsals, royalties, guest artist fees, choreography, and salaries of production staff, music, and wardrobe for each of the concerts. This amount does not change with the number of performances.

Additional costs:

Variable costs associated with each performance are shown below.

Musicians	$6,100
Rental of auditorium	2,500
Dancers’ compensation	6,700

Annual general administrative and operating costs for the dance center are:

Administrative staff	$185,000
Insurance	25,000
Marketing	115,000
General office expenses	90,000

Case Assignment

Required:

Computations (use Excel)

• Summarize key financial information in a table as shown below.

Title
Name of Dance Concert	Revenues/ Performance	Variable Costs/ Performance	Contribution Margin/ Performance	Number of Performances	Total Contribution/ Type of Dance Concert	Direct Fixed Costs	Segment Margin/ Type of Concert
1.
2.
3.
Total

• Use the information in the table you completed to compute the number of performances required to break even for each concert. Do not include general and administrative expenses. These are separate computations for each dance concert.
• Compute break even for the organization as a whole (include all fixed expenses) and express the result in revenues instead of the number of performances.
• Ms. Smith wants the Dance Center to generate at least $200,000 in operating profit. What level of revenues does the performance group need to achieve to meet this goal? Prepare an income statement in good format to support the computations.
• Give a recommendation about changes Ms. Smith can implement to achieve the target profit. Support your idea with computations.

Memo (use Word)

Write a 4- or 5-paragraph memo to the owner of the dance center to assist her in interpreting the financial analysis. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word)

Start with an introduction and end with a summary or conclusion. Use headings.

• What are some shortcomings of multi-product even analysis?
• How does demand and resource constraints affect this type of analysis.

Assignment Expectations

Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

Module 2 – Background

Cost-Volume-Profit Analysis

Modular Learning Objectives

Keep the following objectives in mind as you work through the material in this module:

• Define of cost-volume-profit.
• Understand the relationship between variable costing and cost-volume-profit analysis.
• Apply and analyze break-even.
• Compute break-even in units.
• Compute break-even in sales.
• Analyze target profit.

Required Reading

Variable and fixed costs were introduced in the prior module. Now it is time to examine cost behavior in more detail by familiarizing yourself with the following while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.

Module 2 – Cost-Volume-Profit Analysis

COST-VOLUME-PROFIT Analysis

Cost-volume-profit (CVP) analysis

Companies use cost-volume-profit (CVP) analysis (also called break-even analysis) to determine what affects changes in their selling prices, costs, and/or volume will have on profits in the short run. A careful and accurate cost-volume-profit (CVP) analysis requires knowledge of costs and their fixed or variable behavior as volume changes. A cost-volume-profit chart is a graph that shows the relationships among sales, costs, volume, and profit. The following cost-volume-profit chart depicts the relationships among sales, costs, volume, and profit.

Let us crunch some numbers. We will use Video Productions, a company that produces DVDs, to illustrate actual revenues and costs. Each DVD sells for $20. The variable cost per DVD is $12, and the fixed costs per month are $40,000.

The total cost line represents the fixed costs of $40,000 plus $12 per unit. Thus, if Video Productions produces and sells 6,000 DVDs, the company’s total costs are $112,000, made up of $40,000 fixed costs and $ 72,000 total variable costs ($ 72,000 = $ 12 per unit X 6,000 units produced and sold).

The total revenue line shows how revenues increase as volume increases. Total revenue is $ 120,000 for sales of 6,000 tapes ($20 per unit X 6,000 units sold). In the chart, we demonstrate the effect of volume on revenue, costs, and net income, for a particular price, variable cost per unit, and fixed cost per period.

At each volume, one can estimate the company’s profit or loss. For example, at a volume of 6,000 units, the profit is $8,000. We can find the net income either by constructing an income statement or using the profit equation. The contribution margin income statement gives the following results for a volume of 6,000 units:

Video Productions
Contribution Margin Income Statement
Revenue	$120,000
Less: variable costs	72,000
Contribution margin	$ 48,000
Less: Fixed costs	40,000
Net income	$ 8,000

The contribution margin is the amount by which revenue exceeds the variable costs of producing that revenue. We can calculate it on a per unit or total sales volume basis. On a per unit basis, the contribution margin for Video Productions is $8 (the selling price of $20 minus the variable cost per unit of $ 12).

Contribution Margin = Sales – Variable Cost

The contribution margin indicates the amount of money remaining after the company covers its variable costs. This remainder contributes to the coverage of fixed costs and to net income. In Video Production’s income statement, the $ 48,000 contribution margin covers the $ 40,000 fixed costs and leaves $ 8,000 in net income.

You can also calculate a contribution margin ratio by using the following formula:

Contribution Margin RATIO = Sales – Variable Cost

Profit equation The profit equation is just like the income statement, except it presents the analysis in a slightly different form. According to the profit equation:

Net income = Revenue – Total variable costs – Fixed costs

For Video Productions, the profit equation looks like this:

Net income = $ 120,000 − $ 72,000 − $ 40,000

Net income = $ 8,000

The CVP chart above shows cost data for Video Productions in a relevant range of output from 500 to 10,000 units. Recall the relevant range is the range of production or sales volume over which the basic cost behavior assumptions hold true. For volumes outside these ranges, costs behave differently and alter the assumed relationships. For example, if Video Productions produced and sold more than 10,000 units per month, it might be necessary to increase plant capacity (thus incurring additional fixed costs) or to work extra shifts (thus incurring overtime charges and other inefficiencies). In either case, the assumed cost relationships would no longer be valid.

The following video reviews the contribution margin (variable costing) income statement and its components to prepare for the computation of break-even.

Module 2 – Determining Break-Even

Cost-Volume-Profit Analysis

A company breaks even for a given period when sales revenue and costs charged to that period are equal. Thus, the break-even point is that level of operations at which a company realizes no net income or loss.

A company may express a break-even point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its break-even point, it is still the point of zero income or loss. To illustrate the calculation of a break-even point watch the following video.

Let us compute break-even for Video Productions.

Fixed costs = $40,000

Contribution margin per unit = $20 selling price less $12 variable expenses = $8

Break-even in units: $40,000 / 8 = 5,000 units

Break-even in sales: $40,000 / ($8/$20) = $100,000

Let us test the above computations by creating a contribution margin income statement. The revised income statement below shows that Video Productions break even at $100,000 in sales. Another way to define break-even is to say it is the point where the total contribution margin equals fixed costs.

Video Productions
Contribution Margin Income Statement
Revenue	$100,000
Less: variable costs	60,000
Contribution margin	$40,000
Less: Fixed costs	40,000
Net income	0

Margin of safety = Current sales – Break even sales

Margin of safety = $ 120,000 – $ 100,000 = $ 20,000

Sometimes people express the margin of safety as a percentage, called the margin of safety rate or just margin of safety percentage. The margin of safety rate is equal to

(current sales- break-even sales) / current sales.

Using the data just presented, we compute the margin of safety rate is $20,000 / 120,000 = 16.67 %

This means that sales volume could drop by 16.67 percent before the company would incur a loss.

Although you are likely to use cost-volume-profit analysis for a single product, you will more frequently use it in multi-product situations. The easiest way to use cost-volume-profit analysis for a multi-product company is to use dollars of sales as the volume measure. For CVP purposes, a multi- product company must assume a given product mix. Product mix refers to the proportion of the company’s total sales attributable to each type of product sold.

What about starting a coffee shop? The video highlights the use of break-even for such an endeavor.

Module 2 – Determining Target Profit

Cost-Volume-Profit Analysis

You can also use this same type of analysis to determine how many sales units or sales dollars you would need to make a specific profit (very helpful!). The good news is you have already learned the basic formula, we are just changing it slightly. The formulas we will need are:

Units at Target Profit =

(Fixed Costs + Target Income)/Contribution Margin per unit

Sales Dollars for Target Profit =

(Fixed Costs + Target Income)/Contribution Margin RATIO

These look familiar (or they should!). These are the same formulas we used for break-even analysis but this time we have added target income. If you think about it, it is the same formula because at break-even our target income is zero.

Let’s look at another example. The management of a major airline wishes to know how many seats must be sold on Flight 529 to make $8,000 in profit. To solve this problem, management must identify and separate costs into fixed and variable categories.
The fixed costs of Flight 529 are the same regardless of the number of seats filled. Fixed costs include the fuel required to fly the plane and crew (with no passengers) to its destination; depreciation on the plane used on the flight; and salaries of required crewmembers, gate attendants, and maintenance and refueling personnel. Fixed costs are $12,000.

The variable costs vary directly with the number of passengers. Variable costs include snacks and beverages provided to passengers, baggage handling costs, and the cost of the additional fuel required to fly the plane with passengers to its destination. Management would express each variable cost on a per passenger basis. Variable costs are $25 per passenger.

Tickets are sold for $125 each. The contribution margin is $100 ($125 sales – $25 variable) and the contribution margin ratio is 80% ($100 contribution margin /$125 sales). We can calculate the units and sales dollar required to make $8,000 in profit by:

Units at Target Profit =

Fixed Costs + Target Income = 12,000 + 8,000 = $20,000 = 200 tickets

The sales dollars required could be calculated as break even units of 200 tickets x $125 sales price per ticket = $25,000 or by using the following formula:

Sales Dollars for Target Profit =

(Fixed Costs + Target Income) / Contribution Margin RATIO

or $20,000 / .8 = $25,000

Management can also use its knowledge of cost-volume-profit relationships to determine whether to increase sales promotion costs in an effort to increase sales volume or to accept an order at a lower-than-usual price. In general, the careful study of cost behavior helps management plan future courses of action.

Feedback from the last case:

The Case assignment for Module 1 is concerned with the preparation of a behavioral income statement. You were provided information for the Serious Reader Company with the purpose of preparing a variable income statement. You were also to prepare a variable income statement with the assumption that 90 per cent of all of the books in each category purchased were sold. You were then directed to prepare a third variable income statement and assume the price of the books is increased by 50 per cent for each of the categories. Finally, the income statements were to be reviewed to determine the type of information derived as well as your offering suggestions of how to turn the Serious Reader Company into a full time venture.

Your name and course information should be in the file name.

Assignment-Driven Criteria:

You covered several aspects of the assignment.

Critical Thinking:

Use third person in writings of this nature to promote and maintain objectivity. This will reduce the over use of words such as “I”. Remember, as a consultant you are charges with two duties; identify the problem and provide a solution. Owners and executives are very busy and want to get to the point. The owner provided you numbers. You make calculations and interpret the meaning of the numbers. The interpretation or meaning is the analysis or story to be told to your client. There is no need to provide references for information for your client. It is highly unlikely your client will ever look these up. More importantly, it is not in keeping with what is specifically asked. Although the top line number and bottom line number are very important, the analysis and real story for change occurs between the top line and the bottom line. It is easy to say raise prices and lower expenses. What about focusing on selling more of the profitable books? How about dropping the least profitable line of books? This is where the analysis and definitive recommendation are developed to change the direction of the book store. From a very positive perspective, you recognize this! Remember, every statement should be supported with numbers from your spreadsheet. Also, the memorandum should be a standalone document. In case the spreadsheet is lost, the memorandum makes sense when read. As the expert, you are paid to tell the client what to do, make a definitive solution and tell why. There should be a focus beyond the bottom line. You also run into an issue with the values calculated, i.e. the “inventory”, which impacts the results you discuss.

Scholarly Writing:

Essay looks good.

Presentation, Computation, and Relevance of Financial Information:

Formatting is great. There are miscalculations which will adversely impact the analysis and recommendation to your client. Think … cost of goods sold … the cost of the book sold plus the cost of shipping the book.

Tables are well constructed.

Citing Sources:

Okay.

I have uploaded a PDF solution for you to review to the feedback portal. Let me know if you have any questions or concerns.