Thus profit is highly sensitive to changes in sales price. The column labeled Scenario 1 shows that increasing the price by 10 percent will increase profit 87.5 percent ($17,500). The top part of Figure 6.6 "Sensitivity Analysis for Snowboard Company" shows the value of each variable based on the scenarios presented previously, and the bottom part presents the results in contribution margin income statement format.įigure 6.6 Sensitivity Analysis for Snowboard CompanyĬarefully review Figure 6.6 "Sensitivity Analysis for Snowboard Company". Each column represents a different scenario, with the first column showing the base case and the remaining columns providing answers to the three questions posed by management. How will profit change if fixed costs decrease by $15,000 (30 percent) and variable cost increases $15 per unit (10 percent)?Īnswer: The CVP model shown in Figure 6.6 "Sensitivity Analysis for Snowboard Company" answers these questions.How will profit change if sales volume decreases by 70 units (10 percent)?.How will profit change if the sales price increases by $25 per unit (10 percent)?.How do you answer the following questions for management? Unless told otherwise, assume that the variables used in the base case remain the same. Each scenario is independent of the others. As a result, you are asked to address the following questions from management (you are now performing sensitivity analysis!). We can now plug in any amount of desired profit and calculate how many units we need to sell! This is amazing information for business owners and managers to have available.Question: Although management believes the base case is reasonably accurate, it is concerned about what will happen if certain variables change. So again, we need 137 kayaks sold to make a $30,000 profit!ġ37 kayaks × $500 selling price per kayak = $68,500 in sales. How would we get there using the formula method? So we now need to sell 138 kayaks to profit $30,000! How much in sales do we need? ![]() We simply replace the -0- with $30,000 and now we can calculate how many kayaks we need to sell to meet our profit goal. With this information, how many kayaks do we need to sell to show a $30,000 profit at the end of the month? It is the same exact formula we used to calculate the break-even point! Remember, we put -0- for the profit in when we were looking to break-even. So with that information we now have the following: What if they now want to show a $30,000 a month profit? With the previous information you can then figure out, the dollar sales needed to break even: Remember the formula method is simply a shortened version of the equation method, so both ways should come to the same conclusion. The equation method or the formula method can be used with the same result. ![]() Minnesota Kayak Company needs to sell 28 kayaks in our example to break even. Once the basic data is calculated, it can offer a great deal of insight and help in planning. This is one of the key uses of the CVP analysis. Target profit analysis helps us to know how much in dollar sales a company will need to reach a certain profit point. You have been tasked with figuring out how many kayaks need to be sold in order to get the investors their return! They have talked with your supervisor, and between them all, would like to get $30,000 a month in profit to divide between them. Minnesota Kayak has a few investors who are interested in getting a return on their investment.
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