COST?VOLUME?PROFIT ANALYSIS ASSIGNMENT OVERVIEW The Annie Smith Dance Center The Director of Annie Smith Dance Center is asking

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Rubric Name: Case Grading Rubric for Quantitative Business Courses -Timeliness v1

Criteria Level 4 – Excellent Level 3 – Proficient Level 2 – Developing Level 1 – Emerging Assignment-Driven Criteria 19 points Demonstrates mastery covering all key elements of the assignment in a substantive way.  18 points Demonstrates considerable proficiency covering all key elements of the assignment. 17 points Demonstrates partial proficiency covering all key elements of the assignment. 16 points Demonstrates limited or poor proficiency covering all key elements of the assignment. Presentation, Computation, and Relevance of Quantitative Information 10 points Demonstrates mastery in presenting quantitative information in a format appropriate for the discipline. Supporting computations are relevant and accurate. 9 points Demonstrates considerable proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are mostly relevant and accurate. 8 points Demonstrate partial proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not necessarily relevant and somewhat misleading. 7 points Demonstrates limited or poor proficiency in presenting quantitative information in a format appropriate for the discipline. Supporting computations are not relevant, misleading or absent. Critical Thinking 10 points Analyzes quantitative and qualitative information as the basis for deep and thoughtful discussion, drawing insightful, carefully qualified conclusions from this work. 9 points Analyzes quantitative and qualitative information as the basis for competent and thoughtful discussion, drawing reasonable and appropriately qualified conclusions from this work. 8 points Analyzes quantitative and qualitative information as the basis for workmanlike (without inspiration or nuance, ordinary) discussion, drawing plausible conclusions from this work. 7 points Analyzes quantitative and qualitative information as the basis for tentative or limited discussion; and is hesitant or uncertain about drawing conclusions from this work. Business Writing 6 points Demonstrates mastery and proficiency in written communication to an appropriately specialized audience.  5 points Demonstrates considerable proficiency in written communication to an appropriately specialized audience. 4 points Demonstrate partial proficiency in written communication to an appropriately specialized audience. 3 points Demonstrates limited or poor proficiency in written communication to an appropriately specialized audience. Timeliness 5 points Assignment submitted on time or collaborated with professor for an approved extension on due date. 3 points Assignment submitted 1-2 days after module due date. 2 points Assignment submitted 3-4 days after module due date. 0 points Assignment submitted 5 or more days after module due date. Overall Score Level 4 45 or more Level 3 40 or more Level 2 35 or more Level 1 0 or more

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Module 2 – Case

COST–VOLUME–PROFIT ANALYSIS

Assignment Overview

The Annie Smith Dance Center

The Director of Annie Smith Dance Center is asking for assistance with the financial aspects of running a professional group of performers. She wants financial information presented in an easy to read format and a better understanding of the profitability of the concerts and the organization as a whole.

The Annie Smith professional group features three styles of dance concerts each year. Two of the dance concerts showcase a different genre. The third performance is a Christmas Spectacular, which is the most popular and is therefore scheduled every year. The table below provides information about expected ticket sales for the performances.

	Lower Orchestra Section (A)	Upper Orchestra Section (B)
Descriptions	No. of Seats.	Ticket Price	Tickets sold per performance	No. of seats	Ticket Price	Tickets sold per performance
Hip-Hop Performance	150	$85	100%	450	$50	90%
Jazz and Tap Dance	150	$85	100%	450	$50	60%
Christmas Spectacular	150	$125	100%	450	$50	100%

Ms. Smith has prepared a tentative schedule for the coming season. The table below also shows the type and number of performances and direct cost per type of concert.

Descriptions	Number of Performances	Cost per Dance Concert (direct fixed costs)*
Hip-Hop Concert	10	$48,000
Jazz and Tap Dance	5	86,000
Christmas Spectacular	20	22,000
Total Direct Fixed Costs		$156,000

*Examples of direct fixed costs are costumes, rehearsals, royalties, guest artist fees, choreography, and salaries of production staff, music, and wardrobe for each of the concerts. This amount does not change with the number of performances.

Additional costs:

Variable costs associated with each performance are shown below.

Musicians	$6,100
Rental of auditorium	2,500
Dancers' compensation	6,700

Annual general administrative and operating costs for the dance center are:

Administrative staff	$185,000
Insurance	25,000
Marketing	115,000
General office expenses	90,000

Case Assignment

Required:

Computations (use Excel)

· Summarize key financial information in a table as shown below.

Title
Name of Dance Concert	Revenues/ Performance	Variable Costs/ Performance	Contribution Margin/ Performance	Number of Performances	Total Contribution/ Type of Dance Concert	Direct Fixed Costs	Segment Margin/ Type of Concert
1.
2.
3.
Total

· Use the information in the table you completed to compute the number of performances required to break even for each concert. Do not include general and administrative expenses. These are separate computations for each dance concert.

· Compute break even for the organization as a whole (include all fixed expenses) and express the result in revenues instead of the number of performances.

· Ms. Smith wants the Dance Center to generate at least $200,000 in operating profit. What level of revenues does the performance group need to achieve to meet this goal? Prepare an income statement in good format to support the computations.

· Give a recommendation about changes Ms. Smith can implement to achieve the target profit. Support your idea with computations.

Memo (use Word)

Write a 4- or 5-paragraph memo to the owner of the dance center to assist her in interpreting the financial analysis. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word)

Start with an introduction and end with a summary or conclusion. Use headings.

· What are some shortcomings of multi-product even analysis?

· How does demand and resource constraints affect this type of analysis.

Assignment Expectations

Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner. 

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Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

· Case

Apply break-even analysis to a business scenario.

· SLP

Identify special pricing issues.

Module Overview

Cost-volume-profit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, per-unit variable costs, total fixed costs, and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of production facilities to acquire.

The variable costing income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.

Sales, variable expenses, and contribution margin can also be expressed on a per-unit basis or as a percentage.

Contribution margin ratio (CM ratio)

The CM ratio is calculated by dividing the total contribution margin by total sales.

The CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit.

Break-even analysis

The break-even point can be computed using either the equation method or the contribution margin method.

The equation method is based on the contribution approach income statement.

The equation can be stated in one of two ways:

Profits = (Sales – Variable expenses) – Fixed Expenses

or

Sales = Variable expenses + Fixed expenses + Profits

The contribution margin method has two key equations:

Break-even point in units sold = Fixed expenses divided by CM per unit

Break-even point in sales dollars = Fixed expenses divided by CM ratio

The margin of safety

The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales.

Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure.

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.

An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with a lower proportion of fixed costs.

A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with a lower proportion of fixed costs.

Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Operating leverage

Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales.

The degree of operating leverage is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. It is computed as follows:

Degree of operating leverage = Contribution margin divided by net operating income

The degree of operating leverage is not a constant—like unit variable cost or unit contribution margin—that a manager can apply with confidence in a variety of situations. The degree of operating leverage depends on the level of sales and must be recomputed each time the sales level changes. Also, note that operating leverage is greatest at sales levels near the break-even point and it decreases as sales and profits rise.

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Module 2 – Background

COST-VOLUME-PROFIT ANALYSIS

Modular Learning Objectives

Keep the following objectives in mind as you work through the material in this module:

· Define of cost-volume-profit.

· Understand the relationship between variable costing and cost-volume-profit analysis.

· Apply and analyze break-even.

· Compute break-even in units.

· Compute break-even in sales.

· Analyze target profit.

Required Reading

Variable and fixed costs were introduced in the prior module. Now it is time to examine cost behavior in more detail by familiarizing yourself with the following while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.

Cost-volume-profit (CVP) analysis

Companies use cost-volume-profit (CVP) analysis (also called break-even analysis) to determine what affects changes in their selling prices, costs, and/or volume will have on profits in the short run. A careful and accurate cost-volume-profit (CVP) analysis requires knowledge of costs and their fixed or variable behavior as volume changes.

A cost-volume-profit chart is a graph that shows the relationships among sales, costs, volume, and profit. Look at illustration below. The illustration shows a cost-volume-profit chart for Video Productions, a company that produces DVDs. Each DVD sells for $20. The variable cost per DVD is $12, and the fixed costs per month are $ 40,000.

Cost-Volume-Profit Chart

The total cost line represents the fixed costs of $40,000 plus $12 per unit. Thus, if Video Productions produces and sells 6,000 DVDs, the company’s total costs are $112,000, made up of $40,000 fixed costs and $ 72,000 total variable costs ($ 72,000 = $ 12 per unit X 6,000 units produced and sold).

The total revenue line shows how revenues increase as volume increases. Total revenue is $ 120,000 for sales of 6,000 tapes ($20 per unit X 6,000 units sold). In the chart, we demonstrate the effect of volume on revenue, costs, and net income, for a particular price, variable cost per unit, and fixed cost per period.

At each volume, one can estimate the company’s profit or loss. For example, at a volume of 6,000 units, the profit is $8,000. We can find the net income either by constructing an income statement or using the profit equation. The contribution margin income statement gives the following results for a volume of 6,000 units:

Video Productions
Contribution Margin Income Statement
Revenue	$120,000
Less: variable costs	72,000
Contribution margin	$ 48,000
Less: Fixed costs	40,000
Net income	$ 8,000

The contribution margin is the amount by which revenue exceeds the variable costs of producing that revenue. We can calculate it on a per unit or total sales volume basis. On a per unit basis, the contribution margin for Video Productions is $8 (the selling price of $20 minus the variable cost per unit of $ 12).

Contribution Margin = Sales – Variable Cost

The contribution margin indicates the amount of money remaining after the company covers its variable costs. This remainder contributes to the coverage of fixed costs and to net income. In Video Production’s income statement, the $ 48,000 contribution margin covers the $ 40,000 fixed costs and leaves $ 8,000 in net income.

You can also calculate a contribution margin ratio by using the following formula:

Contribution Margin RATIO = Sales – Variable Cost

Profit equation The profit equation is just like the income statement, except it presents the analysis in a slightly different form. According to the profit equation:

Net income = Revenue – Total variable costs – Fixed costs

For Video Productions, the profit equation looks like this:

Net income = $ 120,000 − $ 72,000 − $ 40,000

Net income = $ 8,000

The CVP chart above shows cost data for Video Productions in a relevant range of output from 500 to 10,000 units. Recall the relevant range is the range of production or sales volume over which the basic cost behavior assumptions hold true. For volumes outside these ranges, costs behave differently and alter the assumed relationships. For example, if Video Productions produced and sold more than 10,000 units per month, it might be necessary to increase plant capacity (thus incurring additional fixed costs) or to work extra shifts (thus incurring overtime charges and other inefficiencies). In either case, the assumed cost relationships would no longer be valid.

The following video reviews the contribution margin (variable costing) income statement and its components to prepare for the computation of break-even.

A company breaks even for a given period when sales revenue and costs charged to that period are equal. Thus, the break-even point is that level of operations at which a company realizes no net income or loss.

A company may express a break-even point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its break-even point, it is still the point of zero income or loss. To illustrate the calculation of a break-even point, watch the following video. https://www.youtube.com/watch?time_continue=9&v=94lrvPlG9P4

Let us compute break-even for Video Productions.

Fixed costs = $40,000

Contribution margin per unit = $20 selling price less $12 variable expenses = $8

Break-even in units: $40,000 / 8 = 5,000 units

Break-even in sales: $40,000 / ($8/$20) = $100,000

Let us test the above computations by creating a contribution margin income statement. The revised income statement below shows that Video Productions break even at $100,000 in sales. Another way to define break-even is to say it is the point where the total contribution margin equals fixed costs.

Video Productions
Contribution Margin Income Statement
Revenue	$100,000
Less: variable costs	60,000
Contribution margin	$40,000
Less: Fixed costs	40,000
Net income	0

Margin of safety = Current sales – Break even sales

Margin of safety = $ 120,000 – $ 100,000 = $ 20,000

Sometimes people express the margin of safety as a percentage, called the margin of safety rate or just margin of safety percentage. The margin of safety rate is equal to

(current sales- break-even sales) / current sales.

Using the data just presented, we compute the margin of safety rate is $20,000 / 120,000 = 16.67 %

This means that sales volume could drop by 16.67 percent before the company would incur a loss.

Although you are likely to use cost-volume-profit analysis for a single product, you will more frequently use it in multi-product situations. The easiest way to use cost-volume-profit analysis for a multi-product company is to use dollars of sales as the volume measure. For CVP purposes, a multi- product company must assume a given product mix. Product mix refers to the proportion of the company's total sales attributable to each type of product sold.

What about starting a coffee shop? The video highlights the use of break-even for such an endeavor. https://www.youtube.com/watch?v=i7uhmGVsbUg

You can also use this same type of analysis to determine how many sales units or sales dollars you would need to make a specific profit (very helpful!). The good news is you have already learned the basic formula, we are just changing it slightly. The formulas we will need are:

Units at Target Profit =

(Fixed Costs + Target Income)/Contribution Margin per unit

Sales Dollars for Target Profit =

(Fixed Costs + Target Income)/Contribution Margin RATIO

These look familiar (or they should!). These are the same formulas we used for break-even analysis but this time we have added target income. If you think about it, it is the same formula because at break-even our target income is zero. https://www.youtube.com/watch?time_continue=7&v=4U60Ya5ysMU

Let’s look at another example. The management of a major airline wishes to know how many seats must be sold on Flight 529 to make $8,000 in profit. To solve this problem, management must identify and separate costs into fixed and variable categories. The fixed costs of Flight 529 are the same regardless of the number of seats filled. Fixed costs include the fuel required to fly the plane and crew (with no passengers) to its destination; depreciation on the plane used on the flight; and salaries of required crewmembers, gate attendants, and maintenance and refueling personnel. Fixed costs are $12,000.

The variable costs vary directly with the number of passengers. Variable costs include snacks and beverages provided to passengers, baggage handling costs, and the cost of the additional fuel required to fly the plane with passengers to its destination. Management would express each variable cost on a per passenger basis. Variable costs are $25 per passenger.

Tickets are sold for $125 each. The contribution margin is $100 ($125 sales – $25 variable) and the contribution margin ratio is 80% ($100 contribution margin /$125 sales). We can calculate the units and sales dollar required to make $8,000 in profit by:

Units at Target Profit =

Fixed Costs + Target Income = 12,000 + 8,000 = $20,000 = 200 tickets

The sales dollars required could be calculated as break even units of 200 tickets x $125 sales price per ticket = $25,000 or by using the following formula:

Sales Dollars for Target Profit =

(Fixed Costs + Target Income) / Contribution Margin RATIO

or $20,000 / .8 = $25,000

Management can also use its knowledge of cost-volume-profit relationships to determine whether to increase sales promotion costs in an effort to increase sales volume or to accept an order at a lower-than-usual price. In general, the careful study of cost behavior helps management plan future courses of action.

Check Your Understanding

Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.

Click on the quiz icon for an ungraded, 20-question true-or-false self-study quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more in-depth information, review materials listed under optional reading at the bottom of this page.

Final Thoughts Cost-Volume-Profit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Break-even analysis (with or without a target profit) is a common CVP approach. Another definition of break-even is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at break-even. Several assumptions underlie CVP analysis: · All cost can be categorized as variable or fixed. · Sales price per unit, variable cost per unit, and total fixed cost are constant. · Mixed costs must be split into their fixed and variable component by an estimation process. · Understanding the behavior of costs makes cost-volume-profit analysis possible.

Optional Reading

For further detail refer to Dr. Walther’s accounting text and videos.

Walther, L. (2017). Chapter 18:  Cost-Volume-Profit and Business Scalability . http://www.principlesofaccounting.com/chapter-18/

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