CVP analysis and financial modeling (adapted from CMA exam). Bronkowski is a ret
ID: 2490496 • Letter: C
Question
CVP analysis and financial modeling (adapted from CMA exam). Bronkowski is a retailer for high-tech recording disks. The projected operating profit for the current year is $200,000 based on a sales volume of 200,000 units. THe company has been selling the disks for $16 each; variable costs consist of the $10 purchase price and a $2 handling cost. THe company's annual fixed costs are $600,000.
Management is planning for the coming year, when it expects that the unit purchase price of the disks will increase by 30 percent.
a. Calculate the company's break-even point for the current year in units.
b. What will be the company's operating profit for the current year if there is a 20 percent increase in projected unit sales volume?
c. What volume of dollar sales must be achieved in the coming year to maintain the current year's operating profit if the selling price remains at $16?
d. Would the use of a financial model be helpful to the firm in addressing issues such as those raised in requirements b. and c.? Explain.
Explanation / Answer
Operating Profit $200,000 Sales Volume 200000 Selling Price 16 Variable cost 10 Handling cost 2 Fixed cost 600000 1 Break even Point = Sales = Variable expenses + Fixed expenses + Profits (where profit is assumed that is zero) 16Q = 12Q+600000 4Q = 600000 Q = 150000 So break even would be 1.5 lac unit to be sold in order to get the break even to the company 2 20 % increase in sale volume Sale volume would be 240000 A Sales (2.4 lac *16) 3840000 Less: Variable cost Variable cost 2400000 Handling cost 480000 B Contribution (A-B) 960000 C Less: Fixed expense 600000 D Operating profit(B minus C) 360000 3 Target volume Fixed cost + Target proft/Contribution margin per unit 600000+200000/($16-$12) Q 200000 Volume in dollar sales 3200000 The company needs to sold 32 lac of dollar amount. 4 Yes, financial modelling always helps to the firm as due to this, firm can anlazye cost benefit analysis based on the different scenario and take the decision which is better for the growth of the firm.