CVP Analysis Young Company is considering entering a market for one product that

Question

CVP Analysis

          Young Company is considering entering a market for one product thatcurrently sells at a price of $32

           perunit. Young has the following two production options toproduce this product:

Option A

Option B

Manufacturing costs per unit

$18

$16

Distribution cost per unit

$6

$6

Fixed costs ($/ month)

$60,000

$90,000

Required:

a.

Monthly break-even unit sales volume under each option (in unitsand dollars).

b.

Units necessary under each option to provide an after tax profitof $15,000 per month (assuming a tax rate of 40 percent).

c.

d.

Determine the monthly sales volume where before tax profit isthe same under both options.

Using your answer to part c., make a recommendation to YoungCompany as to which option is best if the company plans to sell20,000 units per month.

Option A

Option B

Manufacturing costs per unit

$18

$16

Distribution cost per unit

$6

$6

Fixed costs ($/ month)

$60,000

$90,000

Explanation / Answer

OPtion A: COnt pu = Sale prce pu - Variable cost pu = Sale price - (MfgCost pu + DIst cost pu) = 32-(18+6) = 32-24 = $8pu
a. At Break Even, Total Cont = Fixed Cost ie No of units* COnt pu = Fixed Cost ie No of Units = BEP = Fixed Cost/COnt pu = 60000/8= 7500 units pm So Break Even point in OPtion A is 7500units
b.  After tax profit of $15,000 per month (assuminga tax rate of 40 percent) ie PAT = $15000 ie PAT = PBT*(1-T) So PBT = Profit Before Tax = PAT/(1-T) = 15000/(1-0.40) =$25000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+60,000)/8 = 85000/8 = 10625 SO 10625 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
OPtion B: COnt pu = Sale prce pu - Variable cost pu = Sale price - (MfgCost pu + DIst cost pu) = 32-(16+6) = 32-22 = $10pu
a. At Break Even, Total Cont = Fixed Cost ie No of units* COnt pu = Fixed Cost ie No of Units = BEP = Fixed Cost/COnt pu = 90000/10 = 9000units pm So Break Even point in OPtion B is 9000units
b.  After tax profit of $15,000 per month (assuminga tax rate of 40 percent) ie PAT = $15000 ie PAT = PBT*(1-T) So PBT = Profit Before Tax = PAT/(1-T) = 15000/(1-0.40) =$25000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+90,000)/10 = 115000/10 = 11500 SO 11500 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
c. the monthly sales volume where before tax profit isthe same under both options. As can be seen from ans b above, Vol of units sold in optionsfor PBT & PAT will remain same as Tax is onlydiffrential. So in OPtion A, Monthly Sales Vol is 9000 units & inOption B, it is 11500 pm
d. For 20000 units pm, PBT in Option A: PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $8 - $60,000 = $160,000 - $60,000 =$100,000 PAT = PBT*(1-T) = 100,000*(1-0.4) =$60,000
PBT in Option B: PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $10 - $90,000 = $200,000 - $90,000 =$110,000 PAT = PBT*(1-T) = 110,000*(1-0.4) =$66,000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+60,000)/8 = 85000/8 = 10625 SO 10625 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
OPtion B: COnt pu = Sale prce pu - Variable cost pu = Sale price - (MfgCost pu + DIst cost pu) = 32-(16+6) = 32-22 = $10pu
a. At Break Even, Total Cont = Fixed Cost ie No of units* COnt pu = Fixed Cost ie No of Units = BEP = Fixed Cost/COnt pu = 90000/10 = 9000units pm So Break Even point in OPtion B is 9000units
b.  After tax profit of $15,000 per month (assuminga tax rate of 40 percent) ie PAT = $15000 ie PAT = PBT*(1-T) So PBT = Profit Before Tax = PAT/(1-T) = 15000/(1-0.40) =$25000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+90,000)/10 = 115000/10 = 11500 SO 11500 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
OPtion B: COnt pu = Sale prce pu - Variable cost pu = Sale price - (MfgCost pu + DIst cost pu) = 32-(16+6) = 32-22 = $10pu
a. At Break Even, Total Cont = Fixed Cost ie No of units* COnt pu = Fixed Cost ie No of Units = BEP = Fixed Cost/COnt pu = 90000/10 = 9000units pm So Break Even point in OPtion B is 9000units
b.  After tax profit of $15,000 per month (assuminga tax rate of 40 percent) ie PAT = $15000 ie PAT = PBT*(1-T) So PBT = Profit Before Tax = PAT/(1-T) = 15000/(1-0.40) =$25000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+90,000)/10 = 115000/10 = 11500 SO 11500 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs so No of Units = (PBT + FIxed Cost)/Cont pu =(25,000+90,000)/10 = 115000/10 = 11500 SO 11500 units pm are reqd to be sold to make a PBT of $25,000 or a PAT of $15000 pm
c. the monthly sales volume where before tax profit isthe same under both options. As can be seen from ans b above, Vol of units sold in optionsfor PBT & PAT will remain same as Tax is onlydiffrential. So in OPtion A, Monthly Sales Vol is 9000 units & inOption B, it is 11500 pm
d. For 20000 units pm, PBT in Option A: PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $8 - $60,000 = $160,000 - $60,000 =$100,000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $8 - $60,000 = $160,000 - $60,000 =$100,000 PAT = PBT*(1-T) = 100,000*(1-0.4) =$60,000
PBT in Option B: PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $10 - $90,000 = $200,000 - $90,000 =$110,000 PBT in Option B: PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $10 - $90,000 = $200,000 - $90,000 =$110,000 PBT = Total COnribution - Fixed Cost ie PBT = No of Units * COnt pu - Fixed Costs ie PBT = 20,000 * $10 - $90,000 = $200,000 - $90,000 =$110,000 PAT = PBT*(1-T) = 110,000*(1-0.4) =$66,000
Recommendation: For a Sales Volume of 20000units pm, OPtion B is best

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