CVP Analysis Project Established in 1963 in Datura, Italy, Datura, Ltd., is an i
ID: 2463814 • Letter: C
Question
CVP Analysis Project
Established in 1963 in Datura, Italy, Datura, Ltd., is an international importer-exporter of pottery with distribution centers in the United States, Europe, and Australia. The company was very successful in its early years, but since then, its profitability has steadily declined. As a member of a management team, you will gather information for Datura’s next strategic planning meeting, and you have been asked to review its most recent contribution income statement, which appears below.
Datura, Ltd.
Contribution Income Statement
For the Year Ended December 31, 2004
Sales Revenue € 13,500,000
Less Variable Cost
Purchases € 6,000,000
Distribution 2,115,000
Sales Commissions 1,410,000
Total Variable Costs 9,525,000
Contribution Margin € 3,975,000
Less Fixed Cost
Distribution € 985,000
Selling 1,184,000
General and Administrative 871,875
Total Fixed Cost 3,040,875
Operating Income € 934,000
In 2004, Datura sold 15,000 sets of pottery.
Complete Part 1:
1. For each set of pottery sold in 2004, calculate the (a) selling price, (b) variable purchases cost, (c) variable distribution cost, (d) variable sales commission, and (e) contribution margin.
2. Calculate the breakeven point in units and in sales euros.
3. Historically, Datura’s variable costs have been about 60 percent of sales. What was the ratio of variable cost to sales in 2004? List three actions Datura could take to correct the difference.
4. How would fixed costs have been affected if Datura had sold only 14,000 sets of pottery in 2004?
After you have completed part 1 above, read the following and complete part 2.
In January 2005, Sophia Callas, the president and chief executive officer of Datura, Ltd., conducted a strategic planning meeting. During the meeting, Phillipe Mazzeo, vice president of distribution, noted that because of a new contract with an international shipping line, the company’s fixed distribution cost for 2005 would be reduced by 10 percent and its variable distribution costs by 4 percent. Gino Roma, vice president of sales, offered the following information:
We plan to sell 15,000 sets of pottery again in 2005, but based on review of the competition, we are going to lower the selling price to €890 per set. To encourage increased sales, we will raise sales commissions to 12 percent of the selling price.
Sophia Callas is concerned that the changes described by Roma and Mazzeo may not improve operating income sufficiently in 2005. If operating income does not increase by at least 10 percent, she will want to find other ways to reduce the company’s costs. She asks you to evaluate the situation in a short professional report. Because it is already January of 2005 and changes need to be made quickly, she requests your report within 14 days.
Complete Part 2:
1. Prepare a budgeted contribution income statement for 2005. Your report should show the budgeted (estimated) operating income based on the information provided above and in part 1. Will the changes improve operating income sufficiently? Explain
2. In preparation for writing your report, answer the following questions:
a. Why are you preparing the report?
b. Who needs the report?
c. What sources of information will you use?
d. When is the report due?
Please submit your responses, to both sections, in a professional manner.
(See the General Instructions document, in Moodle, for more details).
Everything should be typed.
I highly encourage you to utilize Microsoft Excel (Spreadsheets)!
You may also utilize Microsoft Word.
Explanation / Answer
Part 1 Total Per Unit (total/ 15000) 1 No. of Units Sold 15,000 Sales revenue 13,500,000 900 Less: Variable Cost variable purcchase Cost 6,000,000 400 Variable Distribution Cost 2,115,000 141 Sales Commision 1,410,000 94 Total variable Cost 9,525,000 Contribution 3,975,000 265 Less : Fixed Cost Distribution 985,000 Selling 1,184,000 General and administrative 871,875 Total Fixed Cost 3,040,875 Operating Income 934,125 2 Break Even point in Units Fixed Cost/Contribution per unit 3040875/265= 11475 Break Even Points in Sale Euro Fixed cost/Contribution % Contibuion % contribution/Sales Contibuion % 3975000/13500000 29.444% Break Even Points in Sale Euro 3040875/29.44444% 10327500 3 variable Cost ratio in 2004 variable Cost/Sale 9525000/13500000 70.56% Datura Should Increase Sale price Datura Should reduce material Cost 4 If datura had sold only 14000 units then fixed cost per unit increase Budget 1 No. of Units Sold 15,000 Sale price per unit 890 Sales revenue 13,350,000 Less: Variable Cost variable purcchase Cost 6,000,000 Variable Distribution Cost (96% of2115000) 2,030,400 Sales Commision (12% of sales) 1,602,000 Total variable Cost 9,632,400 Contribution 3,717,600 Less : Fixed Cost Distribution (90% of 985000) 886,500 Selling 1,184,000 General and administrative 871,875 Total Fixed Cost 2,942,375 Operating Income 775,225 Change will reduce operation income