Assessing a Company’s Cost Control Strategies Using Cost-Volume-Profit and Contribution Margin Analysis
Using the Cost-Volume-Profit model and scenarios provided, perform the steps outlined below to determine the impact of the costing method(s) used by the company. Identify what impact the aforementioned costing method(s) have on the Company’s pricing strategy and profitability. You will prepare a written analysis of your findings that is intended for upper management review. Make sure you include in your analysis the outlined scenarios (# and related results).
1.Complete the CVP template using the data provided. (Attached)
2.Calculate the company’s Break-Even (BE) units and dollars at the current price level.
3.Scenario 1, 10% change in selling price. If management is considering a 10% reduction in the Unit Selling Price (USP) as a means for improving sales volume for the upcoming quarter, what is the impact on the Break-Even units and dollars at this new USP at current production levels?
4.Scenario 2, if the lower USP is successful in increasing sales volume for the upcoming quarter, what impact does a 10% increase in units of production have on the BE units and dollars?
5.Based on your analysis, do you recommend that the lower USP tactic be implemented or that it should be foregone?
SUGGESTED READINGS: (ATTACHED)
1) Course Textbook, Profit Planning: Cost-Volume-
Profit Analysis, p.277-297.
2) Course Textbook, Job Costing, p. 316-335.
3) Course Textbook, Process Costing, p. 360-382
1) From the Expert: Allocation of Variable Cost and Ensuing Impact
This video provides a very good overview of Direct Costing and how the allocation of variable costs impact the Contribution Margin and the related Break-Even Analysis. It further explains how the use of these techniques can help to explain the impact that cost has on pricing decisions and volume of production. While the graphics used by the developer of this illustration are less than realistic, the application of the concepts covered is highly relevant in the real world.
YouTube: Action Online – Cost Analysis and Decision Making https://www.youtube.com/watch?v=1m0lbJZehcE
Action Online (January 2, 2014), P3 : Cost analysis and decision-making – M32 : Direct costing
. Retrieved from https://www.youtube.com/watch?v=1m0lbJZehcE
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