You are a management consultant Refer to scenario and produce the following;

Question

Undertake a CVP analysis including monthly breakeven units and a brief interpretation that also highlights any major implication(s) for the business. Interpretation and implication demonstrated providing an insight into the technique and its application in context.

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.

Budget Income Statement Month Sales (Units) Purchases (Units) October November December January February March September 0 5000 October 5000 5000 Sales 50,000.00 $ 60,000.00 $ 70,000.00 $ 85,000.00 $ 100,000.00 $ 100,000.00 November 6000 7000 Cash Investment $ December 7000 3500 Salary Expense 6,000.00 $ 6,000.00 6,000.00 $ 6,000.00 6,000.00 $ 6,000.00 January 8500 10000 Utilities 2,000.00 $ 2,000.00 2,000.00 $ 2,000.00 S 2,000.00 $ 2,000.00 February .000 1000 Insurance 4,000.00 $ 4,000.00 4,000.00 $ 4,000.00 4,000.00 $ 4,000.00 March 10000 10000 Marketing 2,500.00 $ 2,500.00 2,500.00 $ 2,500.00 $ 2,500.00 2,500.00 Based on Sales of $10 per unit Rent Expense 9,000.00 $ 9,000.00 Cost per unit $7.50 Payment 21 Days from Order (Monthly Orders) Product Cost 37,500.00 $ 45,000.00 52,500.00 $ 63,750.00 75,000.00 $ 75,000.00 Purchase of non-current assets 39,000.00 S Non-current assets October November December January February March Furniture, Fixtures & Fittings 30,000.00 $ (Cost of the Asset - Salvage Value) Annual Depreciation Expense = Computer Equipment 9,000.00 $ Useful Life of the Asset Product Sales Schedule October November December January February March Sale (in units) 5000 6000 7000 8500 10000 10000 Sales price/unit 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 Annual Depreciation Expense Revenue 50,000.00 S 60,000.00 70,000.00 $ 85,000.00 $ 100,000.00 $ 100,000.00 Straight Line Depreciation Rate = (Cost of the Asset - Salvage Value) Schedule of credit payments for sales (Collection) October November December January February March From current month 40% $ 20,000.00 $ 24,000.00 $ 28,000.00 $ 34,000.00 $ 40,000.00 $ 40,000.00 From previous month 50% $ 25,000.00 30,000.00 35,000.00 42,500.00 $ 50,000.0 From 2mths prior 10% S 5,000.00 S 6,000.00 $ 7,000.00 S 8,500.00 Straight Line Depreciation Total Payments Reciepted 20,000.00 $ 49,000.00 $ 63,000.00 $ 75,000.00 $ 89,500.00 $ 98,500.00 Item Furniture, Fixtures & Fittings Year Book Value (Beginning of Year) Depreciation Book Value (End of Year) Product Purchases Schedule October November December January February March 1 S 30,000.00 $ 3,000.00 $ 27,000.00 Order (in units) 500 7000 8500 10000 10000 10000 2 27,000.00 $ 3,000.00 $ 4,000.00 Purchase cost/unit 7.50 $ 7.50 $ 7.50 $ 7.50 $ 7.50 $ 7.50 24,000.00 $ 3,000.00 $ 21,000.00 Purchase cost 45,000.00 $ 52,500.00 $ 63,750.00 $ 75,000.00 $ 75,000.00 $ 75,000.00 4 21,000.00 $ 3,000.00 $ 18,000.00 Payment to supplier 37,500.00 $ 45,000.00 S 52,500.00 S 63,750.00 S 75,000.00 $ 75,000.00 5 18,000.00 $ 3,000.00 $ 15,000.00 6 15,000.00 $ 3,000.00 $ 12,000.00 Cash Budget 7 12,000.00 $ 3,000.00 $ 9,000.00 Cash Receipts (Inflow) October November December January February March 8 9,000.00 $ 3,000.00 $ 6,000.00 Receipts from Sales 20,000.00 49,000.00 $ 63,000.00 S 75,000.00 $ 89,500.00 $ 98,500.00 6,000.00 $ 3,000.00 $ 3,000.00 Total Receipts 20,000.00 $ 19,000.00 $ 63,000.00 $ 75,000.00 $ 89,500.00 $ 98,500.00 10 3,000.00 $ 3,000.00 $ Cash Payments (Outflow) Item: Computer Equipment Salary Expense 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 $ 6,000.00 Year Book Value (Beginning of Year) Depreciation Book Value (End of Year) Utilities 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 S 9,000.00 $ 3,000.00 $ 6,000.00 Insurance 4,000.00 $ 4,000.00 $ 4,000.00 $ 4,000.00 $ 4,000.00 $ 4,000.00 2 S 5,000.00 $ 3,000.00 $ 3,000.00 Marketing 2,500.00 $ 2,500.00 2,500.00 $ 2,500.00 $ 2,500.00 $ 2,500.00 3,000.00 $ 8,000.00 $ 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 Purchase of assets 39,000.00 $ Total Cash Payments 100,000.00 $ 59,500.00 $ 67,000.00 $ 87,250.00 $ 89,500.00 89,500.00 Cash Surplus/Deficit 80,000.00 -$ 10,500.00 -$ 4,000.00 -$ 12,250.00 S 9,000.00 Opening Cash Balance 59,000.00 -$ 21,000.00 -$ 31,500.00 -$ 35,500.00 -$ 47,750.00 -S 47,750.00 Closing Cash Balance 21,000.00 -$ 31,500.00 -$ 35,500.00 -$ 47,750.00 -$ 47,750.00 -$ 38,750.00