Quantitative Analysis Final By: Maria Sciappi SNHU - Cost Accounting 1
The Hampshire Company I. Cost-Volume-Profit Analysis A.Cost Volume Profit Analysis (CVP) examines the impact on operating profit of different amounts of volume and costs. This helps to determine a break-even point for cost structures based on different sales growth to assist managers in making short-term economic decisions. This helps in properly understanding the relationship between profits and costs on one side, and volume on the other side. The CVP Analysis is beneficial when creating budget estimates that demonstrate costs at various levels of activity. This is also valuable when a company is attempting to figure out the number of sales to reach a targeted income. Cost Volume Profit Analysis for The Hampshire Company Requirement 1 UnitsPriceTotals Sales60,000$12.50 $750,000.00 Variable Costs60,000$6.00$360,000.00 Fixed Costs$295,525.00 Net Income$94,475.00 Requirement 2 Contribution Margin per Unit in Dollars = Selling Price - Variable Costs Selling PriceVariable Costs Contribution Margin per Unit $12.50 $6.00 $6.50 Contribution Margin Ratio = Contribution Margin/Selling Price Contribution MarginSelling PriceContribution Margin Ratio $6.50 $12.50 52% 2
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The Hampshire Company Requirement 3 Break-Even Point = Fixed Costs / Contribution Margin Fixed Costs Contribution MarginBreak-Even Point in Units (Rounded) $295,525 $6.50 45,465 Break-Even Point in Units X Selling Price per Unit = Break-Even Point Sales Break-Even Point in UnitsSelling Price per UnitBreak-Even Point in Sales (Rounded) 45,465 $12.50 $568,313 Requirement 4A Margin of Safety in Units = Current Unit Sales - Break-Even Point in Unit Sales Current Unit SalesBreak-Even Point in SalesMargin of Safety in Units 60,00045,465 14,535 Requirement 4B Margin of Safety in Dollars = Current Sales in Dollars - Break-Even Point Sales in Dollars Current Sales in DollarsBreak-Even Pointin Dollars Margin of Safety in Dollars $750,000 $568,313$181,688 Requirement 4C Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales Margin of Safety in UnitsCurrent Unit SalesMargin of Safety Percentage 14,535 60,000 24% 3
The Hampshire Company Requirement 5 Degree of Operating Leverage = Contribution Margin / Operating Income Contribution MarginOperating IncomeOperating Leverage $390,000.00 $94,475.004.1281 Requirement 6 Units$ Per UnitTotals Sales72,000$12.50 $900,000.00 Variable Costs72,000$6.00 $432,000.00 Fixed Costs$295,525.00 Net Income$172,475.00 Operating LeverageTimes % IncreaseIncrease would be XX% 4.12812082.56 Prior Income$94,475.00From Part 1 Increase$77,998.56Prior Income X XX% Above Total$172,473.56 Requirement 7 Targeted Income = (Fixed Costs + Target Income) / Contribution Margin Fixed Costs + Target IncomeDivided by Contribution Margin# of Units (Rounded) Fixed Costs$295,525 Target Income$120,000 Total$415,525$6.5063,927 # of Units Above X $ Per Unit ProofRevenueXX,XXX X $XX.XX$799,087 Variable CostsXX,XXX X $383,562 4
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The Hampshire Company $X.XX Contribution Margin$415,525 Fixed Costs$295,525 Net Income$120,000 Requirement 8 Sales Mix CurrentSpecialtyTotal Expected Sales Units60,00 0 5,000 Revenue = Sales X Price$750,000$55,000$805,000 Variable Costs X Units$360,000$31,000$391,000 Contribution Margin$390,000$24,000$414,000 Fixed Costs$310,525 Operating Income$103,475 Prior Net Income From Requirement 1$94,475.00 Additional Operating Income(Operating Income Above Less Prior Income)$9,000.00 Yes, this should be accepted because there would be an extra $9,000.00 in revenue. B.A Cost Value Profit Analysis was completed for the Hampshire Company. This included the sale price, the fixed costs, the variable costs, the numbers of umbrellas sold, and how much profit they made in 2014. The main focus is to earn a profit and this depends on the cost of manufacturing and volume of sales. This CVP Analysis for The Hampshire Company shows the overall performance of the umbrellas and it determines how many umbrellas should be sold to break even and how many would make a profit. This will help management at The Hampshire Company understand how changes in sales volume, 5
The Hampshire Company variable costs, and pricing affect the profit while assuming the fixed costs are unchanging. C.The CVP analysis shows that The Hampshire Company made $750,000.00 in revenue from selling 60,000 umbrellas for $12.50 each. The variable cost was $360,000.00. The fixed cost was $295,525.00 which covered the materials. This left the net income amount to be $94,475.00. The contribution margin ratio was 52% which had a total sale of $390,000.00. With the anticipated 20% increase for 2015, increasing the units to 72,000, without increasing the fixed costs, would increase the revenue by $150,000.00. The net income would be $172,475.00 instead of $94,475.00. D.While calculating the break-even revenue of the contribution margin of $6.50, the break- even quantity was 45,465. The margin of safety was 14,535 with a break-even revenue of $568,313.00. This analysis shows that The Hampshire Company made a break-even point by selling 60,000 umbrellas and had $750,000.00 in revenue which put them over the break-even point margin. II. Inventory Management A.Cost allocation methods are commonly used as a management accounting tool to help determine the costs associated with various departments within an organization. Proper cost allocation is critical to ensuring that organizations run efficiently and effectively. Allocating the costs associated with various service departments within an organization enables management to develop a clear understanding of the actual cost of their services or products. Actual costs are required for the creation of accurate accounts in order to properly bill clients. Variable costing and Absorption costing are accounting methods used for evaluating a company's work in progress and inventory. Absorption costing 6
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The Hampshire Company incorporates all costs associated with the production of a product. Variable costing includes only the variable costs incurred directly in production and excludes all fixed costs. Absorption vs. variable costing will only be a factor for companies that expense costs of goods sold (COGS) on their income statement. (Stapleton, 2022) Between the two methods, it's also critical to grasp the distinction between direct and indirect costs on the income statement. COGS are typically associated with direct costs, which affect a company's gross profit and gross profit margin. Indirect costs are associated with a company's operating expenses. These expenses have a significant impact on operating profit and the operating profit margin. Wages for workers physically manufacturing a product, raw materials used in producing a product, and direct overhead costs involved in manufacturing a product are some of the direct costs associated with manufacturing a product.
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