Chapter 6 CVP Prepare data 1. Go to sec.gov and download the most recent financial statements of the company of your choice (choose merchandise business) in the Excel format. It will show you 3-year comparative financial statements. 2. Look at the income statement. This might be called statement of operating results, or some other similar names. 3. Prepare the data in the following format. Sales -Cost of goods sold (or cost of sales or merchandise costs) =Gross margin -Operating expenses (combine all other expenses other than cost of cost of goods sold) = Net Operating income (income from operations or Earnings before interest expense and income taxes) (ignore all the rest such as interest expense, tax expense etc. Just focus on operating income) Analyze the data 1. Assumptions to use: -If you choose merchandise business: Assume that 0% cost of goods sold and 20% of Company X's other operating expenses are fixed (this means 100% of Cost of goods sold and 80% of other operating expenses are variable) - If you choose manufacturing business: Assume that 20% cost of goods sold and 20% of Company X's other operating expenses are fixed (this means 80% of Cost of goods sold and other operating expenses are variable) 1) Prepare contribution margin format income statement for 3 years Sales -Variable costs =Contribution margin -Fixed costs =Net operating income 2) Calculate Contribution margin ratio (CMR) for the last 3 years. What is the trend in the contribution margin ratio over the last three years? 3) Calculate the Breakeven point in sales revenue for the last 3 years. What is the trend in the breakeven point for operations, measured in sales dollars, over the last three years? 4) Calculate the margin of safety in sales dollars and % relative to sales for the last 3 years. What is the trend in the margin of safety? 5) What is operating leverage for the last 3 years? a. How would operating income change if sales decline by 10%? b. How would operating income change if sales increase by 10%? 2. Prepare a memo to the CEO interpreting the results of the analyses. Discuss your key assumptions and the importance of those assumptions to the analysis. 3. [If you want to play with the data further, try this!] 1) How would the results change if the proportion of operating expenses that are fixed increases to 40%? If the proportion of operating expenses that are fixed falls to 5%? You may want to play with your data to see how your numbers change on the spreadsheet. 2) Collect historical data (maybe from 10 years ago?) and do the above requirements. Compare those with your results from the most recent 3 years. What are your observations?