Part -1:
CVP Analysis
Your current financials from part 1 are for Year 1 of your business. Create Year 2 financials by assuming the following:
1. 4.5% decrease in total sales volume for product 1
2. 2% increase in total sales volume for product 2
3. Direct material costs per unit increased. The increase in direct materials caused a 2¾% increase in materials per unit for all products
Be sure to format your contribution income statement for both products like Exhibit 5-5 on page 206. In addition, include per unit amounts for sales, variable expenses, and contribution margin.
Using year 2 financials assume the following CVP analysis scenarios.
Since sales volume for product one decreased you would like to try to increase sales again by one of the following methods:
a. Increase advertising by 10%
b. Buy lower quality materials. Two different suppliers could provide you with lower quality materials for your product.
i. Using supplier "I'm cheap" would decrease direct materials by 1.5%.
ii. Using a different supplier "I'm Cheapest" would decrease direct material costs by 2¾% but since it is so cheap, you have to use 3% more material per unit.
Which choice would be the best in order to break-even? Which would be the best to have at least the same amount of profit as you earned in year 1?
You are not 100% committed to the choice you selected above - create your own scenario and determine the break-even and profit point.
Considering all options select the best choice.
Part 2
Dropping or Retaining a Segment
You are considering the possibility of simplifying your business model and focusing on less products, thereby discontinuing product two. Initial research has shown that 65% of product 2 fixed expenses are sunk and will continue even if the product line is discontinued. In addition, you think that demand for product one may initially decline. The decline is estimated to be a 15% decrease in sales of product one. Using Year 2 financial information: should product two be discontinued? What will be the overall effect on net operating income of the company as a whole?
Upon additional research you realized someone had made an error. This error resulted in the high estimate of sunk costs (65%). If sunk costs were only 25% what would be the overall effect on net operating income of the company as a whole? Should product two be discontinued?
Attachment:- Project Workbook.rar