Question

Undertake aCVP analysisincluding monthly breakeven units and a brief interpretation that alsohighlights any major implication(s) for the business. Interpretation and implication demonstrated providing an insight into the technique and its application in context.

Please check if I have calculated everything correctly. Please provide a brief summary of any major implications for the business.

Please look over my calculations and see if they are correct to for a CVP analysis of the scenario.

Refer to scenario and calculations.

Scenario

Dev Patel has registered a new private company for his latest business venture. Dev is the only shareholder of the company. He intends opening to customers in the first week of October and he wants the business to begin making a monthly operating profit of $10,000 within the first six months of operation. In September, Dev intends to open a company bank account and deposit $20,000 plus the sum required to buy company non-current assets. These assets will be bought and paid for by the company on October 1 st. Dev expects furniture, fixtures and fittings to cost $30,000 and have a 10-year useful life, while computer equipment will cost $9,000 and have a 3-year useful life. All these assets will be depreciated using the straight-line method but none have any expected salvage value at the end of their useful lives.

Dev's business will sell candles to homeware stores for $10 each.Projected monthly sales in units (candles) are: 5,000 in October; 6,000 in November; 7,000 in December; 8,500 in January; and 10,000 each month after that. Forty per cent of customers are expected to pay in the month of sale, 50% in the month after sale, and the remainder in the second month after sale.

Negotiations with a supplier resulted in a one-year contract starting in September that specifies an $7.50 cost per unit for a monthly order of at least 5,000 units and payment to be made within 21-days of order.The contract also specifies order delivery within one week so Dev plans to order in the third week of each month, commencing in September, and pay at the end of the credit period. He will order the number of units that he expects the business to sell in the upcoming month.

Expected company operating expenses per month from October onwards, all of which will be paid for in the month incurred are: wages $6,000; utilities $2,000; insurance $4,000; and marketing $2,500. In addition, quarterly rent payments of $9,000 for an office and storeroom will be made in advance, commencing at the beginning of October.

Straight Line Depreciation Non-current assets: Furniture, Fixtures & Fittings Year lue (Beginning of Year) Depreciation Book Value (End of Year) 1 S 30,000.00 3,000.00 27,000.00 2 27,000.00 3,000.00 S 24,000.00 24,000.00 S 3,000.00 21,000.00 4 21,000.00 $ 3,000.00 18,000.00 5 18,000.00 3,000.00 15,000.00 6 15,000.00 3,000.00 12,000.00 12,000.00 3,000.00 S 9,000.00 LD CO 9,000.00 S 3,000.00 6,000.00 $ 6,000.00 3,000.00 3,000.00 10 3,000.00 S 3,000.00 Non-current assets: Computer Equipment Year lue ( Beginning of Year Depreciation Book Value (End of Year) 1 S 9,000.00 3,000.00 6,000.00 2 6,000.00 3,000.00 3,000.00 3 3,000.00 3,000.00 Breakeven Units and Sales Salary Expense 6,000.00 Fixed Cost 18,000.00 Utilities 2,000.00 Divide: Contribution Margin Insurance 4,000.00 (10-7.5) S 2.50 Marketing 2,500.00 Breakeven units (monthly) 7200 Rent Expense 3,000.00 Depreciation - Furniture, Fi $ 250.00 Fixed Cost 18000 Depreciation - Computer 250.00 Divide: Contribution Margin Rate 18,000.00 (2.5/10) 0.25 Breakeven sales (monthly) 72,000.00Budget Income Statement September October November December January February March Sales (in units) 5000 6000 700 8500 10000 10000 Sales price/unit 10.00 $ 10.00 10.00 $ 10.00 $ 10.00 $ 10.00 Projected Sales 50,000.00 60,000.00 $ 70,000.00 $ 85,000.00 $ 100,000.00 $ 100,000.00 in in in in Variable Cost (@ $7.50 per unit) 87,500.00 45,000.00 $ 52,500.00 $ 63,750.00 $ 75,000.00 $ 75,000.00 Contribution Margin 12,500.00 $ 15,000.00 $ 17,500.00 $ 21,250.00 $ 25,000.00 $ 25,000.00 Fixed Cost Salary Expense 6,000.00 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 Utilities 2,000.00 2,000.00 $ 2,000.00 2,000.00 $ 2,000.00 $ 2,000.00 Insurance 4,000.00 4,000.00 $ 4,000.00 4,000.00 4,000.00 $ 4,000.00 Marketing 2,500.00 2,500.00 $ 2,500.00 2,500.00 $ 2,500.00 $ 2,500.00 Rent Expense 3,000.00 3,000.00 3,000.00 3,000.00 $ 3,000.00 $ 3,000.00 Depreciation - Furniture, Fixtures & Fittings 250.00 250.00 $ 250.00 $ 250.00 $ 250.00 250.00 Depreciation - Computer 250.00 250.00 S 250.00 250.00 S 250.00 $ 250.00 Fixed Cost Total (Monthly) 18,000.00 18,000.00 $ 18,000.00 $ 18,000.00 $ 18,000.00 $ 18,000.00 Projected Net Income 5,500.00 -$ 3,000.00 -$ 500.00 $ 3,250.00 $ 7,000.00 $ ,000.00 Schedule of credit payments for sales (Collection) September October November December January February March From current month 10% $ 20,000.00 $ 24,000.00 $ 28,000.00 S 84,000.00 $ 40,000.00 $ 40,000.00 From previous month 50% $ 25,000.00 $ 30,000.00 35,000.00 $ 42,500.00 $ 50,000.00 in in in u From 2mths prior 10% $ 5,000.00 $ 6,000.00 $ 7,000.00 $ 8,500.00 Total Payments Reciepted S 20,000.00 $ 19,000.00 S 53,000.00 $ 75,000.00 $ $9,500.00 $ 98,500.00 Product Purchases Schedule September October November December January February March Order (in units) 5000 6000 7000 8500 10000 10000 10000 Purchase cost/unit 7.50 $ 7.50 $ 7.50 $ 7.50 $ 7.50 $ 7.50 $ 7.50 Purchase cost 37,500.00 45,000.00 52,500.00 S 63,750.00 75,000.00 75,000.00 75,000.0 Payment to supplier 37,500.00 $ 45,000.00 $ $2,500.00 $ 3,750.00 $ 75,000.00 $ 75,000.00 Cash Budget Cash Receipts (Inflow) September October November December January February March Receipts from Sales Total Receipts 20,000.00 $ 49,000.00 63,000.00 S 75,000.00 $ 89,500.00 $ 98,500.00 $ 20,000.00 19,000.00 $ 3,000.00 $ 75,000.00 $ 9,500.00 $ 8,500.00 Cash Payments (Outflow) Salary Expense 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 5,000.00 Utilities 2,000.00 2,000.00 $ 2,000.00 2,000.00 $ 2,000.00 $ 2,000.00 Insurance 4,000.00 4,000.00 $ 4,000.00 4,000.00 $ 4,000.00 1,000.00 Marketing 2,500.00 2,500.00 $ 2,500.00 2,500.00 2,500.00 2,500.00 Rent Expense 9,000.00 9,000.00 $ Product Cost (Payment to Supplier) 37,500.00 45,000.00 52,500.00 63,750.00 $ 75,000.00 75,000.00 39,000.00 Total Cash Payments 100,000.00 59,500.00 $ 67,000.00 $ 87,250.00 S 89,500.00 89,500.00 Cash Surplus/Deficit 80,000.00 -$ 10,500.00 -$ 4,000.00 -$ 12,250.00 $ 9,000.00 Opening Cash Balance 59,000.00 $ 59,000.00 -$ 21,000.00 -$ 31,500.00 -$ 35,500.00 -$ 47,750.00 -$ 47,750.00 Closing Cash Balance 59,000.00 -$ 21,000.00 -$ 31,500.00 -$ 35,500.00 -$ 47,750.00 -$ 47,750.00 -$ 38,750.00