Question

Tom James is starting an online dating service and wants to analyze the Cost-Volume-Profit (CVP) relationships. TJ’s Love Connection charges clients $20 for each date arranged. Fixed costs for advertising, computer hardware, software, rent, utilities, furniture, Web site, security, and file back-up are $5,000 per month. Variable costs for entering data and finding a proper match for each client are $10 per date. The total income tax rate is 40%. TJ projects that he will arrange 325 dates for the first month of operations. His relevant operating range is 325 to 766 units (dates) per month which will be analyzed in 10% increments. In section 3 – column 1, the starting unit value of 325 is transferred from the input section and each successive value is incrementally increased. Taxes and Profit/Loss are calculated with an if-then formula. The spin control buttons can increase or decrease the various input variables (see insert/form controls in Excel).

Answer 1

CVP Analysis:

Cost Volume Profit analysis is used to determine how changes in cost and volume can have an impact on the Company's Income.

Here,

Unit price per date is $20

Tax rate is 40%

Variable cost per unit $10

Fixed cost $5000

Units sold 325

Increment 10%

Sales (20*325) 6500

Variable cost (10*325) 3250

Fixed cost 5000

Operating Income (loss) 1750

Tax 0 (no tax on loss)

Net income (1750)