Cost-Volume-Profit analysis is essential in determining the production levels in firms needed to achieve certain profit levels. It is good in cost planning in the firm to ensure that there is control of the costs, the production volume and the fixed costs. A break-even analysis is always conducted to ensure that to determine the production levels and the associated revenues to make sure the firm covers all the costs. With all factors held constant, the firm should ensure production and sales do not fall below this threshold. If the firm produces more than one product, a multiproduct break-even analysis is done using the weighted average method to determine the average production levels to cover all the costs (Bergo et al., 2016). This memo covers the interpretation of key financial information analyzed.
Summary of key financial information and respective break-even points
The first task was to assess the key financial information. The output was finding the segment margin for each type of concert. It was found that both hip-hop performance and Christmas spectacular both have positive margins while the Jazz and Tap dance had negative margins. The total margin for all the concerts is $594750. The break-even analysis for each concert was conducted. The break-even point was found by dividing the direct fixed cost by the contribution margin per performance. The result was rounded off to integers rather than decimal performances. Hip-hop dance needs three performances to break-even, Jazz and Tap dance need eight performances to break even, while Christmas spectacular needs only one performance to break-even.
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| Name of Dance Concert | Revenues/ Performance | Variable Costs/ Performance | Contribution Margin/ Performance | Number of Performances | Total Contribution/ Type of Dance Concert | Direct Fixed Costs | Segment Margin/ Type of Concert |
| Hip-Hop Performance | 33000 | 15300 | 17700 | 10 | 177000 | 48000 | 129000 |
| Jazz and Tap Dance | 26250 | 15300 | 10950 | 5 | 54750 | 86000 | -31250 |
| Christmas Spectacular | 41250 | 15300 | 25950 | 20 | 519000 | 22000 | 497000 |
| Total | 100500 | 45900 | 54600 | 35 | 750750 | 156000 | 594750 |
The Break-even for the organization as a whole
A multi-product break-even analysis was conducted since there are three products,. The weighted averages used in the analysis were the number of performances. The contributions used was the total contribution per performance, while the total fixed costs were the sum of the direct fixed cost and the annual general and administrative expenses. The break-even number of performances was found to be 26.62 which should be rounded off to 27 performances. The distribution according to weights is 8 performances for the hip-hop dance, 4 performances for the Jazz and Tap dance, and 16 performances for Christmas spectacular. The total revenue was computed with the 26.62 performances and found to be $978286.7
Level of Revenues to achieve the targeted profit of $200,000
The targeted profit was added to the total fixed costs, the resulting amount was divided by the Weighted Average Contribution. The total performances were 35.94 which are estimated to 36. The distribution of performances by weight is 11 performances for the hip-hop dances, 6 performances for the Jazz and Tap and 20 performances for Christmas spectacular. The total Revenue at this production level is $1,320,944.
Recommendation on the changes to achieve the targeted profit
Product elimination with a loss rather than a positive contribution margin is the major change that is needed. Jazz and Tap dances are not able to meet the direct fixed costs at the current performance levels. Therefore, they should be dropped so that Ms. Smith only concentrates on hip-hop performances and Christmas Spectacular. This was backed up by comparing the income statement when all the three performances were done at the profit-making point of $200,000. The number of performances remained constant, only the Jazz and Tap were eliminated; the outcome was a higher profit by $29773.2
Limitations of Multi-product even analysis
A multi-product even analysis is done to determine the product quantities needed to cover all the costs of the firm. It is also important in determining the level of production needed to achieve targeted profits. As much as this method is good in determining the required product mix, it has its own shortcomings. Some of the disadvantages are human error especially in the estimations, limited multi-product operations, and the approximations and assumptions made by the methods.
The human error, in this case, results from bad estimations of the variable and the fixed costs. In this method, the variable production costs have to be apportioned per unit to the product. It is difficult to correctly assign specific costs to specific products in real-life circumstances (Firescu & Branza, 2016). For instance, one cannot determine which portion of electricity cost to assign to production as a variable cost and which portion to assign as a fixed cost. The human error in the estimation of the costs will automatically lead to errors in the computations and results. The management cannot rely on such information for decision making.
Multi-product break-even analysis is realistic when a firm has about 3 products they manufacture or sell. However, it is not realistic for a retail store, supermarkets, or restaurants with too many products. The complexity in the computation to come up with a weighted average method for each item limits its use. One will find it difficult to apportion costs and consumption levels (Firescu & Branza, 2016). Therefore, the method is only good if the seller specialized in approximately 3 products; but not in an industry where a single seller trades in a large variety of products.
The final shortcoming of the method is the insufficiency of the approximations made by Cost-Volume-Profit Analysis. The results of the analysis are meant to guide the managers in determining the approximate production levels and not the exact production. This is because the ratios sometimes would approximate that production should use a certain mix ratio to achieve a certain target profit; however, there may be a scarcity of the resources or uncertainties in the future which greatly undermines the budgeted production levels. Resource constraints limit the production to the required levels or projected costs while demand constraints affect the sales units hence reducing the total contribution (Kholeif, 2018).
In conclusion, cost-volume-profit analysis is essential in determining the approximate production levels but not the real levels to be adopted. More focus has to be based on expert judgment to determine production levels. In addition, the use of the method is good when one has few products to sell and accurately knows how to apportion the costs, it is not efficient for a business with a wide range of products.
References
Bergo, G. S. Z., Lucas, B. H., Sobreiro, V. A., & Nagano, M. S. (2016). Multiproduct cost-volume-profit model: a resource reallocation approach for decision making. Journal of Cost Analysis and Parametrics , 9 (3), 164-180.
Firescu, V., & Branza, D. (2016). Cost Volume Profit, A Managerial Accounting Technique. Scientific Bulletin-Economic Sciences , 15 (3), 25-34.
Kholeif, A. O. (2018). Managerial Accounting.
Stoenoiu, C. E. (2018). Sensitivity of indicators used in cost-volume-profit analysis. In MATEC Web of Conferences (Vol. 184, p. 04003). EDP Sciences.
