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This report is about a non-graphical CVP analysis and sensitivity analysis of a sports goods manufacturer, in conjunction with a software house. The sports goods manufacturer is considering the launch of a new sporting simulator based on videotapes linked to a personal computer enabling much greater realism to be achieved. Two proposals are considered. Both use the same production facilities and, as these are limited, only one product can be launched. The firm has a minimum target of £ 200,000 profit per year for new products. The management recognises the uncertainty in the above estimates and wishes to explore sensitivity of the profit on each product to changes in the values of the variables. Therefore, this report will be calculated the expected profit from each product and the critical value for each variable, assuming that all other variables are as expected value. Lastly, it will be discussed the factors which should be considered in making choice between the two products.
Non-graphical CVP analysis and sensitivity analysis
CVP analysis ( in excel format)
Price per unit
Variable Costs per unit
Price per unit
Variable Costs per unit
Factors of making choice between two products
As the result of the sensitivity table which shown at above, cricket simulator has a critical value which will be the profitable product in the market as a new launching sport good. In the sensitivity table, the percentages change between the expected value and the revised value for cricket simulator is lesser than the football simulator. Therefore, it is a good result to make the decision to launch cricket simulator rather than football simulator to the market. As the result, cricket simulator is able to meet the minimum target of £ 200,000 profit per year.
In the present day of competitive scenario, the survive of a business is depends upon the production of quality goods at the lowest price. Due to the fluctuation in the demand, the profit of the business is affecting. Profit is the basic incentive to business pursuits. The management of the business should analyse the cost, volume and profit in order to find out right solution for various problems which may encountered during the business.
Break-Even Point is another name of cost-volume profit analysis. A break-even point refers to the point of activity where the total revenue equals to the total cost. It is a point of no profit and no loss. There are two methods which are used to calculate the break-even point. They are break-even point (in units) and break-even point (in amounts). (Karunakar Patra, 2006)
Assumptions underlying CVP analysis
The usefulness of any model in decision-making is restricted by the assumptions on which it is based. CVP analysis is based on a number of assumptions. These assumptions are that sales price per unit remains constant, although economists point out that in order to sell additional units, selling price must usually be reduced. Second, variable cost per unit of output remains constant, ignoring the impact of the learning curve, quantity discounts, etc., and assuming no economies or diseconomies of scale.
Third, Fixed costs remain unchanged in respect to volume changes. Fourth, the ability to accurately segregate/ classify fixed and variable costs. Fifth, volume/ output is the only factor influencing cost. Lastly, in a manufacturing business, sales equals production or, alternatively, stock is valued at variable cost of production.
Strengths of Cost-Volume-Profit
The cost-volume-profit concerned with investigating the interrelationship between cost, volume and profit. It is an important tool which managers can use to assist them in both profit-planning and budgeting. By monitoring the interaction between these three factors, alternative courses of action can be evaluated in the light of the levels of profit which would be generated. CVP can be used to evaluate alternative courses of action in terms of profit for a period of time, a single department, a promotional package or for the operation as a whole.
CVP analysis also enables calculation of the break-even point. This is the point at which all costs (fixed and variable) have been covered, and any further sales will contribute directly to profit. Harris (1992) suggests that this has important motivational benefits for managers, through knowing that they have achieved break-even point, and that subsequent sales will be contributing to profit.
This technique provides an analysis of figures which is suited to both historical and future-oriented decision-making. It offers new insights and support for managers planning and developing their business, whether it is showing areas where they have made good decisions, or areas where opportunities can be found to generate profit.
The break even analysis is simple to understand and easy to operate. Besides that, it is discloses the relationship among cost, volume and profit. A break-even chart is providing as a snapshot about the various performance of financial information. And, it is useful in forecasting of cost, sales and profits at various levels of production. (Karunakar Patra, 2006)
Weaknesses of Cost-Volume-Profit
The limitation of cost-volume-profit analysis is that it is presumed that the anticipated capacity of production remains same. But it may be increased depending upon the need. The analysis of cost-volume-profit gives satisfactory result only if element of costs remain stable. But in actual practise is varies. It is again presumed that plant capacity remains same. However, the cost-volume-profit relationship does not hold good if manual labour is replaced by machines or high cost of materials are substituted by low cost materials. In a business with many varieties of products, it becomes difficult to forecast the profits more accurately. (Rao, 2003)
The limitation of break-even analysis the break-even chart all costs can be classified into fixed and variables. But there are certain neither costs which are neither fixed nor variable, which affect management discretion and policy. Break-even analysis assumes that fixed costs are constant at all volumes and variable costs vary direct proportion to the volume, but this valid only within a limited range of operations. The break-even analysis ignores the time factor and the investments. Besides that, the break-even chart unable to disclose the employed by the firm which is important factor for managerial decisions. (Karunakar Patra, 2006)
Non-financial measures are believed to be superior to short term profit figures as indicators of progress towards a firm's long-term goals (American Accounting Association, 1971; Johnson and Kaplan, 1987). The incremental use of non-financial measures is related to the reality that they are concerned with causes and they are not related not effects. Profit and other financial measures indicate the effects of non-financial activities and achievements, while factors of customer satisfaction, job satisfaction internal processes, and the organization's innovation and improvement activities are thought to be the drivers of future financial function. (Kaplan and Norton, 1992; Singleton-Green, 1993; Cross and Lynch, 1992)
No matter how financially viable a project is, the staff motivation is important for a project to succeed. As in the sports goods manufacturer, they can do motivate their staffs to improve their output like they can have the desire to serve people or customers and they can improve their personal skills or achieved promotion. Organisation have to creates a good working environment for their employees so that they will feel valued and it will motivated them to do well in their work, generally through increased communication and being asked for their opinions. Employee motivation is also likely to be higher if the organisation invests in its staff through training and development. In between, this enhances their knowledge, skills and their sense of job satisfaction. So it can help the organisation to increase in their sales and gain more profit.
Customer is the key of a business, the customer satisfaction will influence on a company's business and also its stock value. Keep yourself informed about the company's reputation amongst its customers. Your investment is good as long as customers are happy with the company. This is especially true in highly competitive markets. As the sport goods manufacturer has launching a new sport simulator, the important is to meet the customer satisfaction. In those two products, it must be suitable for customer to use on it. The sports goods manufacturer has to well understand what are the needs and wants of the customer, therefore they could able to meet customer's satisfaction then produce the nice products to sell.
A good manager always consider the consequences of government's actions and inactions at any project they want to execute like invest in some projects that are financially not viable just to meet government requirements. The local government is not profit oriented, profit is not important for them. They may take this account to focus on higher services and meeting the budget.
Green activities has recently gained popularity to the extent that sport goods manufacturer is not investing in equipment that preserve the environment are seen as a non responsive and irresponsible by the public who will in turn become customers later. In order for sport goods manufacturer to preserve this benefit, it sometimes has to invest in some projects that are not too financially sound.