Information: Using the information from WCB’s flexible budget, created for WCB P
ID: 2463006 • Letter: I
Question
Information:
Using the information from WCB’s flexible budget, created for WCB Part #5, perform a CVP analysis on the for power systems harmonics analysis line. In doing your analysis, you should use the management team’s best guess for next year’s performance: 500 analyses sold for $15,000 each.
Assignment:
Identify key assumptions: What are the key assumptions of a CVP analysis? How valid do you feel these assumptions are for WCB’s new line? Explain.
How many analyses must the company sell to break even?
What is the current safety margin on the new line?
Assuming that WCB has a 30% tax rate, how many analyses must the line sell in order to contribute $1,000,000 to WCB’s net income?
WCB’s sales manager has suggested that the company double direct advertising for the line in order to increase sales by 5%. Currently the line has $65,000 worth of direct advertising. Would you support her recommendation? Defend your answer.
Explanation / Answer
The main assumptions for the CPV analysis are :
1) The products selling price and the variable cost are expressed as per unit.
2) Both selling price and the variable cost are directly proportionate to the production.
3) Fixed cost of production is constant.
4) Fixed cost inversely proportionate to the production.
If the WCB’s new line's production cost are classified as fixed and variable and its selling price is fixed per unit, then the CVP analysis could be implemented to WCB’s new line.
analyses must the company sell to break even = Fixed Cost / Contribution per unit
the current safety margin on the new line = Current Sales - Break even point sales
many analyses must the line sell in order to contribute $1,000,000 to WCB’s net income=
= Fixed elements (Fixed cost + tax + expected net income) / Contribution per unit
the advertising expenses must be added to the fixed element and selling units are calculated to trade-off.