Assessment - Portfolio: Group CVP and Budget Report
Investors and creditors frequently use CVP Analysis to screen business plans by evaluating a firm's cost structure and sales volume needed to generate profit. Suppose you are planning to open a "Boutique Hotel" accommodation, you are expected to determine all relevant financial data and prepare a CVP analysis.
You must refer, in text, to a minimum of 12 journal articles, plus others as required, in order to show competency in the assessment. Failure to meet this standard will result in a fail grade for this assessment.
Executive Summary
Provide a maximum one-page summary, include a snapshot of the results you calculated in your analysis and your recommendations based on these results.
Introduction
Provide a brief introduction to your report including a short summary of the business and activities, as key background/context.
Key business assumptions
All Boutique Hotel room prices below include accommodation and breakfast, list all key assumptions for your business and complete the following table:
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Key assumption
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Value
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Location
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Sydney
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Room price: Deluxe
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H $500 S $400 L $350
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Room price: Standard
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H $400 S $350 L $250
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Occupancy %: Deluxe
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H 100% S 90% L 70%
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Occupancy %: Standard
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H 100% S 80% L 60%
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Number of Deluxe rooms
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20
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Number of Standard rooms
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40
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Business start up costs
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$1,000,000 start up assets
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Start up depreciation (20%)
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$200,000
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All these key assumptions are to be carefully researched and correctly referenced including defining which months of the year are high, shoulder and low season. Carefully consider the differences in price and costs of a Deluxe and Standard room.
Identify and classify all relevant costs
Identify and classify all relevant costs that your business is likely to incur, as the business is a new start up, prepare the following table:
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Product costs
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Period Costs
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Direct material
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Direct labour
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Overhead
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Selling
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Administration
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Breakfast DMs such as bread, eggs, cereal, coffee beans, fruits, vegetables, meats
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Chef
Servers
Barista
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Utilities
Kitchen Rent
Kitchen Depreciation
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Advertising
Sales staff salaries
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Office Depreciation
Office Rent
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Rooms DMs such as shampoos, soaps, wine, chocolates, logo branded bath robes, champagne
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Housekeeping
Front Office
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Utilities
Room Rent
Room Depreciation
Maintenance
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Identify each cost and classify as variable, fixed or mixed cost, list the total cost in dollars. Develop one or two paragraphs about each set of costs, explaining the behaviour and purpose of each cost. For each of your expected costs, estimate variable cost per unit and total fixed cost. For mixed costs, be sure to identify variable and fixed cost components.
CVP analysis -
Complete your CVP analysis, clearly explaining what each means, assume tax rate is 30%:
1. What is the Weighted Average Selling Price (WASP) per unit?
2. What is the Weighted Average Contribution Margin (WACM) per unit?
3. What is the Contribution Margin Ratio (CMR)?
4. What is the total fixed cost and variable cost per unit?
5. What is sales volume in units and sales dollars at breakeven point?
6. Show breakeven points graphically.
7. Perform "what if" analysis of breakeven by considering the following:
(i) Increasing fixed cost by 10%
(ii) Increasing variable costs by 10%
(iii) Decreasing selling price by 10%
8. What are the Operating Leverage and Safety Margin for your business? Carefully explain what this means in terms of the risk to your business.
9. Calculate sales needed to earn an after tax profit of $210,000. Carefully explain if $210,000 is realistic, if not, what would be a more realistic after tax target profit?
10. Carefully explain the best ways that your business can increase its profitability.
Budget analysis -
You will prepare a Capital budget (start up budget) and a Master budget (operating budget for the first 12 months) together with supporting report and other information as listed below. Note your start up budget should assume that 50% of the cost of establishing the business would be borrowed.
The Report should be written as if it were being presented to a potential purchaser or investor/financier in the business. Borrowing terms should be advised in the report. Remember interest repayments are included in the operational budget; the principal repayments are shown on the balance sheet as a reduction in the liability. The Balance Sheet preparation is not a requirement of this assessment.
Capital budget: brief start up budget for project including working capital requirement until business revenue can support expenses and interest payments on liabilities. Resource utilisation decisions may be discussed to justify your strategy.
Master budget: 12 months operating budget, a commentary and description of the basis of key assumptions made, mentioning the costing methods used. Use the Balanced Score Card approach to present the key assumptions and justify them by the research and analysis undertaken. Your business needs to use published award wages, industry benchmarks and decisions to establish budget figures, these are to be referenced in your report.
Conclusions, observations and recommendations
Conclude all the findings of your analysis; address the fixed costs, variable costs and income statement, CVP analysis, contribution margin etc. Discuss critically key results that would impact on your business future decision-making, including explaining how you could improve your business by making any changes. Include your recommendations to the proposed investor/purchaser and ideas for the next steps to progress the business concept.
Appendix -
Excel spread sheet: in Appendix, detailing key assumptions and in correct format. The budget should be summarised in the body of your report but your full budget should be attached. Include a 12-month operational budget with a total column for the year and perform vertical analysis on this total column for benchmarking purposes. Include a start up capital budget showing the costs in starting your proposed new start up business.
Note - Length - Minimum of 3000 words - maximum group of 3 members.