7-69 Discussion Questions 1. Define breakeven point. Why is the breakeven point
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7-69 Discussion Questions 1. Define breakeven point. Why is the breakeven point important to managers? 2. Describe four different ways cost-volume-profit analysis could be useful to managene material for its signature handbags for $2 less per bag than in the prior year. Kee everything else the same, what effect would this reduction in material cost have on breakeven point for Rockwell Fashion Bags? Now assume that the sales manager de to reduce the selling price of each handbag by $2. What would the net effect of both 3. The purchasing manager for Rockwell Fashion Bags has been able to purchase th these changes be on the breakeven point in units for Rockwell Fashion Bags? 4. Describe three ways that cost-volume-profit concepts could be used by a service organization. 5. "Breakeven analysis isn't very useful to a company because companies need to do more than breakeven to survive in the long run." Explain why you agree or disagree with statement. 6. What conditions must be met for cost-volume-profit analysis to be accurate? 7. Why is it necessary to calculate a weighted-average contribution margin ratio for a of the products' contribution margin ratios just be added together and averag 8. Is the contribution margin ratio of a grocery store likely to be higher or lower than product company when calculating the breakeven point for that company? Why can't al a plastics manufacturer? Explain the difference in cost structure between a grocery store and a plastics manufacturer. How does the cost structure difference impact operating risk? 9. Alston Jewelry had sales revenues last year of $2.4 million, while its breakeven po dollars) was $2.2 million. What was Alston Jewelry's margin of safety in dollars? Wha does the term margin of safety mean? What can you discern about Alston Jewelry trom its margin of safety? 10. Rondell Pharmacy is considering switching to the use of robots to fill prescriptions consist of oral solids or medications in pill form. The robots will assist the human ph cists and will reduce the number of human pharmacy workers needed. This change pected to reduce the number of prescription filling errors, to reduce the customer's wa me, and to reduce the total overall costs. How does the use of the robots affect Pharmacy's cost structure? Explain the impact of this switch to robotics on Rond macy's operating risk. 11. Suppose a company can replace the packing material it currently uses with a bic able packing material. The company believes this move to biodegradable packin terials will be well-received by the general public. However, the biodegradabl ma materials are more expensive than the curren t packing materials and the margin ratios of the related products will drop. What are the arguments for the to use the biodegradable packing materials? What are the arguments for the contribu comp How can CVP techniques be used in supporting a company's sustainability efforts comp use the biodegradable materials? What do you think the company should do 12. Conversely, how might Cvp be a barrier to sustainability efforts?Explanation / Answer
1Q. Define Break-even point. Why is the break-even point important to managers?
Break-even analysis is a widely used technique to study the CVP relationship. Break-even-Analysis attempts to study the revenue and costs in relation to sales volume of a business unit and to determine that point where sales revenue just equals to total costs.
According to Matz, Curry and Frank, “a Break-even-analysis indicates at what level cost and revenue are in equilibrium.
According to Charles T. Horngren, “The Break-even Point is that point of activity (Sales Volume) where total revenues and total expenses are equal; it is the point of zero profit and zero loss”.
Importance of Break-even point for managers:
Generally the main objective of any business is to earn profits and also they will try to maximise their profitability. The following points of break even point helps the managers in their day-to-day decisions related to sales, volume and profit etc.,
2Q. Describe four different ways Cost-volume-profit analysis useful to management.
The amount of profit on the sale of a product depends upon volume of production and its costs. So, there is a close relationship among, cost volume and profit. The cost volume profit analysis is an attempt to measure the effect of changes in volume, cost, price and product-mix on profits.
Basing on the Cost-volume-profit analysis the management can take the important decisions in the following aspects. This analysis supports to take right decision for the following important decision areas.
Total costs are segregated into fixed and variable costs for the purpose of this analysis. Change in production volume is associated with change in Marginal costs only. For calculation of profit at different levels of the production, the marginal costs are subtracted from sales. The residual value is known as contribution. If fixed cost deducts from this contribution the profit will get.
An understanding of CVP analysis is extremely useful to management in budgeting and profit planning. It explains the impact of the following on the net profit:
In another way the CVP analysis can be used to answer to the questions suchas:
3Q. If material cost for signature hand bags reduces $2 per bag, then , if sale price is same , the profit per bag increase by $2. Why because it reduces the variable cost per unit and the break even point occurs before than earlier point.
If the sales manager reduces its sale price by $2, then it balances the change in variable cost and change in sales price. So, finally no change occurred in Break-even point.
4Q. Describe the 3 ways CVP concepts can be used by service organisaitons.
CVP analysis can be applied to service organizations also.
The key is to measure the output of the service organizaiotn. Unlike production and marketing companies that measure their output in product units, product measurement differs from one sector of services to another.
For example, airlines measure miles of passengers and hotels / motels using nights in the occupied room. Government agencies measure production in the number of customers served and universities use credit hours to students.
CVP analysis involves three elements in service organisations:
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