Cost-Volume-Profit Analysis Project

The purpose of this project is to develop a CVP analysis that can be used to determine how changes in the business plan and economic conditions will affect a client's financial situation. Your goal will be to use Excel in such a way that any changes to the assumptions will correctly flow through the entire profitability analysis. If executed properly, the client should be able to use this spreadsheet over and over, using different "what if" assumptions.

Business Description

After taking business classes, Jed, an avid poultry enthusiast, decided to start selling unique poultry supplies at trade shows. He has two products:

Product 1: "Wash-it"- a egg washer that will sell for $100.

Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the bird pecks a target. The treat dispenser will sell for $50.

Costs: Jed has hired an employee to work the trade show booths. The work contract is $1,000 per month plus a commission equal to 10% of revenue. Jake will also spend $400 per month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico. Wash-its cost $50 each; Treat-times cost $22 each. Shipping and handling on the Wash-its will cost $5 each; Shipping and handling on the Treat-times, which are heavier, will cost $8 each. The shipping and handling costs will be paid by Jed, not the customer.

Assume Jed expects to sell 200 Wash-its and 100 Treat-times during his first month of operations (June).

Jed's financial goal is to earn an operating income of $10,000 per month. He believes volume may grow at a rate of 5% a month.

Directions

You have been hired by Jed to build a CVP model that will help him understand the impact of business conditions on his operating income. (See "Starting File" worksheet.) In your model, all of the original assumptions will be listed in one area of the spreadsheet (blue box). All other calculations in the model will reference the assumptions (blue box) such that if any assumption changes, the effect will ripple through the entire model. To accomplish this goal, you will use FORMULAs, rather than numbers, in every other cell in the worksheet. In other words, the only place you will type numbers is the blue assumptions box.

FIRST TASK: Rename your worksheet to include your name.

FORMATTING conventions to use throughout project:

- Round all UNITS to the nearest whole unit. Use the "decrease decimals" button on your tool bar rather than the Rounding function.

- Show all MONETARY amounts as dollars and cents. Round to the nearest cent. ($x.xx). Use the "decrease decimals" button rather than the rounding function.

- Show all percentages as %, not as decimals. (x%, not .xx)

- Right justify all cells (numbers should be to the right side of the cell, not in the middle or left)

1) Complete the assumptions (blue box) based on the data about Jake's business. Identify and list all variable costs separately and all fixed costs separately before finding the total for each type of cost.

2) Complete the Product Analysis (yellow boxes) assuming Jed ONLY sells either Product #1 (Wash-its) OR Product #2 (Treat -times).

Check figures: B/E Product #1 = 40 ; B/E Product #2= 93

3) Complete the pro forma CM Income Statement for the month of June (green box). HINT: On product line income statements such as this, the fixed costs are only listed in the total column. Make sure you also show the totals for all other line items. Finally, calculate the overall WACM% for the company.

Check figure: Operating income = $7,100 WACM% = 34%

4) Calculate the weighted average contribution margin (WACM) per unit (in orange box).

Check figure: WACM/unit = $28.33

5) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven (TOTAL column in the first gray box). THEN, calculate the number of EACH type of product needed to breakeven. Finally, calculate the sales revenue associated with this volume for EACH product, and then the sales revenue to breakeven in total.

Check figures: B/E Product #1 = 33; B/E Product #2= 16

6) Use the WACM/unit to calculate the total number of units needed to achieve Jake's target profit (TOTAL column in the second gray box). THEN, calculate the number of EACH type of product needed to achieve the target profit. Finally, calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total.

Check figures: T/P Product #1 =268; T/P Product #2= 134

7) Calculate the MOS using June sales as the expected sales (purple box). Calculate the MOS in terms of sales revenue and as a percentage. Also calculate the current operating leverage factor (round to the nearest 2 decimal places) and use it to determine the expected percentage change in operating income stemming from an expected change in sales volume.

Check figures: MOS%= 84%; Operating leverage factor=1.20

8) Change name of worksheet to "Original Assumptions".

9) Make sure you have cleaned up your worksheet using the formatting conventions listed above.

10) Go to the "Advising client" worksheet and follow the directions found there.

11) Check to make sure you have done everything on the grading rubric. Submit your completed file on the Portal.

\begin{tabular}{|l|l|} \hline \multicolumn{2}{|c|}{ ASSUMPTIONS } \\ \hline Product \#1: & Wash-it \\ \hline Sales price per unit & \\ \hline Variable costs per unit: & \\ \hline & \\ \hline & \\ \hline & \\ \hline Total variable cost per unit & \\ \hline & Treat-time \\ \hline Monthly volume & \\ \hline Product \#2: & \\ \hline Sales price per unit & \\ \hline Variable costs per unit: & \\ \hline & \\ \hline & \\ \hline & \\ \hline Total variable cost per unit & \\ \hline & \\ \hline Monthly volume & \\ \hline & \\ \hline Fixed costs per month: & \\ \hline & \\ \hline & \\ \hline Total fixed costs per month & \\ \hline Target profit per month & \\ \hline & \\ \hline Expected change in volume (\%) & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Product \#1 & Wash-it \\ \hline Unit CM & \\ \hline CM \% & \\ \hline Breakeven point: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline & \\ \hline Target profit volume: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Product \#2 & Treat-time \\ \hline Unit CM & \\ \hline CM \% & \\ \hline Breakeven point: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline & \\ \hline Target profit volume: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Breakeven point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at breakeven & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Target profit point: & Product \# 1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at target profit & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Breakeven point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at breakeven & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Target profit point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at target profit & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Margin of Safety (in \$) & \\ \hline Margin of Safety \% & \\ \hline & \\ \hline Operating Leverage Factor & \\ \hline & \\ \hline Expected \% change in operating income (\%) & \\ \hline \end{tabular} EXCEL HINT: To copy an entire worksheet, right click on the worksheet tab at the bottom of the screen and choose "Move or Copy". Then check the "create a copy" Once you have built the model, use it to answer Jed's questions about his business. Treat each situation as a separate scenario. All comparisons should be made to the original assumptions. 1. Save a copy of your original model to a new spreadsheet called "supplier cost increase". Say the supplier is expected to increase the cost of the products by 20%. What is the new operating income? What is the new WACM\%? What is the new MOS\%? Briefly explain your findings to the client. 2. Save a copy of your original model to a new spreadsheet called "new sales mix". Say the monthly sales volume is now expected to be 175 "Treat-times" and 125 "Wash-its" (same total units, but a different sales mix). What is the new operating income? What is the new WACM/unit ? Given this sales mix, how many units (in total will Jed need to sell to earn his target profit? Briefly explain your findings to the client. 3. Save a copy of your original model to a new spreadsheet called "alternative contract". Say Jed's employee wanted to negotiate a different work contract: $1,500 per month plus 5% of revenue. Given his original sales volume and mix, how would this contract have changed Jake's operating income? What is the new operating leverage factor? What is the new expected percentage change in operating income if volume increases as expected in the future? Briefly explain your findings to the client. \begin{tabular}{|l|l|} \hline \multicolumn{2}{|c|}{ ASSUMPTIONS } \\ \hline Product \#1: & Wash-it \\ \hline Sales price per unit & \\ \hline Variable costs per unit: & \\ \hline & \\ \hline & \\ \hline & \\ \hline Total variable cost per unit & \\ \hline & Treat-time \\ \hline Monthly volume & \\ \hline Product \#2: & \\ \hline Sales price per unit & \\ \hline Variable costs per unit: & \\ \hline & \\ \hline & \\ \hline & \\ \hline Total variable cost per unit & \\ \hline & \\ \hline Monthly volume & \\ \hline & \\ \hline Fixed costs per month: & \\ \hline & \\ \hline & \\ \hline Total fixed costs per month & \\ \hline Target profit per month & \\ \hline & \\ \hline Expected change in volume (\%) & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Product \#1 & Wash-it \\ \hline Unit CM & \\ \hline CM \% & \\ \hline Breakeven point: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline & \\ \hline Target profit volume: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Product \#2 & Treat-time \\ \hline Unit CM & \\ \hline CM \% & \\ \hline Breakeven point: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline & \\ \hline Target profit volume: & \\ \hline -in units & \\ \hline -in sales revenue & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Breakeven point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at breakeven & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Target profit point: & Product \# 1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at target profit & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Breakeven point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at breakeven & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|l|} \hline Multiproduct Target profit point: & Product \#1 & Product \#2 & Total \\ \hline -in units & & & \\ \hline Sales revenue at target profit & & & \\ \hline \end{tabular} \begin{tabular}{|l|l|} \hline Margin of Safety (in \$) & \\ \hline Margin of Safety \% & \\ \hline & \\ \hline Operating Leverage Factor & \\ \hline & \\ \hline Expected \% change in operating income (\%) & \\ \hline \end{tabular} EXCEL HINT: To copy an entire worksheet, right click on the worksheet tab at the bottom of the screen and choose "Move or Copy". Then check the "create a copy" Once you have built the model, use it to answer Jed's questions about his business. Treat each situation as a separate scenario. All comparisons should be made to the original assumptions. 1. Save a copy of your original model to a new spreadsheet called "supplier cost increase". Say the supplier is expected to increase the cost of the products by 20%. What is the new operating income? What is the new WACM\%? What is the new MOS\%? Briefly explain your findings to the client. 2. Save a copy of your original model to a new spreadsheet called "new sales mix". Say the monthly sales volume is now expected to be 175 "Treat-times" and 125 "Wash-its" (same total units, but a different sales mix). What is the new operating income? What is the new WACM/unit ? Given this sales mix, how many units (in total will Jed need to sell to earn his target profit? Briefly explain your findings to the client. 3. Save a copy of your original model to a new spreadsheet called "alternative contract". Say Jed's employee wanted to negotiate a different work contract: $1,500 per month plus 5% of revenue. Given his original sales volume and mix, how would this contract have changed Jake's operating income? What is the new operating leverage factor? What is the new expected percentage change in operating income if volume increases as expected in the future? Briefly explain your findings to the client