INTRODUCTION TO MANAGEMENT ACCOUNTING Assessment 3 John Doe CVP Case Yannick Harvey (0704853)

Tutor: Mark Jackson

Requirement 1

Cost Classification

Fixed

Variable

Advertising Wages: Lawyer Paralegal Legal Secretary Clerk-Receptionist Fringe Benefits Overtime: Legal Secretary Clerk-Receptionist Rent Property Insurance Utilities Malpractice Insurance Depreciation: Office Equipment Office Supplies

Calculation for Total Fixed Cost Advertising $980,000 Hourly Wages: Lawyer Paralegal Legal Secretary $50 x 16 hrs x 360 days = $288,000 $40 x 16 hrs x 360 days = $230,400 $30 x 16hrs x 360 days = $172,800

Clerk-Receptionist - $20 x 16 hrs x 360 days = $115,200 $806,400

Fringe Benefits 40% of $806,400 $806,400 x 40/100 = $322,560 Overtimes: Legal Secretary 200 hrs x $30 x 1.5 (time & a half) = Clerk-Receptionist - 200 hrs x $20 x 1.5 (time & a half) = $9,000 $6,000 $15,000 Rent 6,000 square feet x $56 per square foot = $336,000 Property Insurance - $54,000 Utilities - $74,000 Malpractice Insurance - $360,000 Office Equipment (depreciation) Straight line (Cost/Useful Life) = $120,000/4 years = $30,000 Total Fixed Cost = ($980,000+$806,400+$322,560+$15,000+$336,000+$54,000+$74,000+$360,000+$30,000) = $2,977,960

Requirement 2 Clients to Break-even 1st of the year Total fixed cost for the year = $2,977,960 Total contribution margin for 1st year = (Selling Price-Variable Cost) x (Number of clients in the first of the year) ($300-$50) x (50 clients per day x first 180 days) = 250 x 9000 = $2,250,000 Total fixed cost for the year Total Contribution Margin $2,977,960 - $2,250,000 = $727,960 (Fixed Cost Balance) Therefore Breakeven = (Fixed Cost Balance)/Total contribution margin for 2nd year $727,960/$413.98-$50 = $2000 + 9000 clients for 2nd half of year = 11,000 clients to breakeven Sales at Break-even Point Break-even in sales = Break-even in units x Selling Price 1st half of year B/E in sales units = 9,000 clients x selling price $300 = $2,700,000

2nd half of year B/E in sales units = 11,000 x selling price 413.98 = Therefore sales at break-even =

$4,553,780 $7,253,780

Requirement 3

$4,000,000

$3,000,000

$2,000,000

$1,000,000

TFC TVC

$0 0 ($1,000,000) 400 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 4,000

TC Sales Profit

($2,000,000)

($3,000,000)

($4,000,000)

1st Half of Year

$4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 0 ($1,000,000) ($2,000,000) ($3,000,000) ($4,000,000) 400 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 4,000 TFC TVC TC Sales Profit

2nd Half of Year

Requirement 4 a. Break-even analysis can be very helpful in the evaluation of a new business venture. In most situations, success takes time. Many new enterprises and products actually operate at a loss (at a point below break-even) in early stages of growth and development. Knowing the price or volume necessary to break-even is critical to evaluating the time-frame in which losses are permissible. The break-even is also an excellent benchmark by which the companys short-term goals can be measured or tracked. Break-even analysis mandates that costs be analyzed. It also keeps a focus on the connection between production and marketing.

b. i. Break-even calculation tells you nothing about what sales are actually likely to be for the product at various cost prices.

ii. Fixed costs (FC) are assumed to be constant. Although in the short run this may prove to be true, an increase in the scale of production is likely to cause fixed costs to rise. iii. These calculations assume that average variable costs are constant per unit of output, at least in the range of likely quantities of sales. iv. These calculations assume that the quantities of goods produced are equal to the quantity of goods sold. (Beginning and ending inventories) v. In multi-product companies, these calculations assume that the relative proportions of each product sold and produced are constant. c. Margin of safety is used in break-even analysis to indicate the amount of sales that are above the break-even point. In other words, the margin of safety indicates the amount by which a companys sales could decrease before the company will become unprofitable. The design of the safety margin is based on assumptions made during the business analysis phase. These assumptions might not be accurate for various reasons, such as insufficient data, errors in judgement, or unanticipated external events. Planning for a safety margin should not be the only business goals but throughout future planning so the solution that is designed can handle unexpected events. d.
Fixed cost + [ (After tax profit)/(1 Tax rate)] Contributi on margin per unit

X=

$2,977,960+ [($600,000)/ (1-.4)] $413.98-$50 = $10,929 + 9000 units to B/E in 1st year = 19,929 new clients