CMA USA Part-2 section-C
Ø Target monitory amount of after-tax profit:
When calculating the target sales volume and target revenue with
a specific after-tax profit goal. Convert the require after-tax profit
before beginning the calculation.
Pre-tax profit:= after-tax profit ÷ 1- tax rate
more
Pre-tax profit × [ 1- tax rate]
Target volume = fixed cost + pre-tax profit ÷
CMR
Ø
Target percentage of revenue as an after-tax profit:
Target volume = FC ÷
adjusted contribution margin/unit
Adjusted contribution margin/unit = CM/unit – pre-tax profit/unit
Pre-tax profit = after-tax profit % × SP ÷ [1- tax rate]
Ø Using break-even analysis in decision-making:
Break-even analysis can also use in two specific decision-making situations.
1.
Determining if the company should increase fixed
marketing costs.
Target volume = FC + pre tax ÷ CM
The company presently sells only 500 units which are not enough
to meet its pre-tax operating income requirement.
To increase sales companies management is considering a new
marketing program that would cost $1000.
It helps to increase 500 unit sales here $1000 is the fixed cost.
Ø
Calculation of target volume:
Target volume = FC + fixed marketing cost + pre-tax profit ÷
CM/ unit
= 4600 + 100+ 500 ÷ 1.8/ unit = 5889 unit.
Here target volume has increased to 5889 units, because of
the increase in fixed cost.
Therefore the 5500 unit anticipated sales following the new
marketing program will not be adequate.
Ø
Reducing the selling price to increase sales:
Example: fixed cost 4600
Variable cost 2.2
Selling price 4
Target pre-tax of income 5000
Target volume = 5334
Currently, the company sold 5000 units only, which is not enough to
meet its profit requirement.
To increase sales company wants to cut its selling price
from $4 to $3.75
Managers believe they can sell $6000 units.
Total cost = FC + VC
Ø CVP and conditions of risk and uncertainty :
1.
Risk :
It is related to the probability that the outcome has been predicted currently.
2.
Uncertainty:
In the ability to predict the possible outcome.
Ø
Expected value:
When a situation has several possible outcomes expected value
can be used to determine the outcome to use In a decision model.
Ø
Deterministic approach:
In the deterministic approach, the single most likely outcome is used in the decision
model.
Eg: above premium 300k is the most likely outcome 40%.[explanation
in youtube]
Ø
Sensitivity and CVP analysis :
It is an analysis that measures the impact of changes in one
variable on another variable.
For example, sensitivity analysis can determine the changes in
operating income that could take place if sales level changes or if cost
changes.
VC increase CM decrease
VC decreases CM increase
Ø
Margin of safety:
= actual or planned sale – break-even sale
Ø
Margin of safety ratio:
MSR = margin of safety ÷ actual or planned sale.
Ø Break-even analysis when more than one product is sold:
When more than one product is sold assume that the company has a constant sales mix.
It includes break-even quantity with a sales mix and break-even sales with a sales mix.
Ø Break-even quantity with sales mix:
It can be calculated by using two methods,
1.
Percentage method:
2.
Basket method:
Ø
Percentage method:
BEP unit when more than one product sold
= fixed cost ÷ weighted average contribution
margin/unit
\
Ø Basket method: [ composite method]
Here we assume a basket contains 10 units [ any size basket
can be used ]
1.
Calculate the BEP unit by using the composite or basket
method.
The basket contains 10 unit
Product A
10 units into 40%= 4 units.
Product B
10 units into 60% = 6 unit
2.
Calculate the weighted average contribution margin
per unit
= [1.5 × 4] + [1.25×6] = $13.5
3.
Calculate BEP
= FC ÷weighted average CM /unit
= 75000÷ 13.5 =5556
Product A:
5556 × 4= 22224
Product B :
5556× 6= 33336
Ø Break-even sales revenue with a sales mix:
FC÷ weighted average CM ratio
Ø
Other decisions in CVP analysis:
1. Choosing between two cost options:
Example: JJ motors have 45 employees to market its
automobiles, and the company provides a 6%
commission to a salesperson.
JJ motors are considering changes to the salary and giving
$2000 per month for each salesperson and +3% commission on his/her sales.
Question: determining the amount of total monthly car sales
revenue at which JJ motors would be indifferent as to which plan its selects.
6/100 = 0.06.
6% of sale = [2000× 45] +3% sale
0.06x = [2000× 45 ] = + 0.03x
0.06x = 90000+0.03x
0.06x – 0.03x = 90000
.3x = 90000
X= 3000000
3000000× 6% = 180000
90000+ [ 3000000× 3%]
90000+90000= 180000
Ø
3000000
2.
Using fixed versus variable input:
Two types of companies,
1.
Labor-intensive company
2.
Automated company
Example: purchasing a machine for $25000 cost it's highly automated and not required its a variable cost of $.5/unit.
Cost $10000 it required labor its variable cost is $2.5/ unit.
3.
Product mix decision under control:
4.
Choosing between two production options:
Profit = [SP× unit sold]- [ variable cost ×
unit sold] – fixed cost
Or
Profit = [ CM /unit × unit sold] – fixed cost
[ example and explanation in youtube, soon..]