Question

Subject: Please read the instructions carefully. You learned that cost volume profit analysis is used to analyze decisions. Management uses CVP analysis to plan future projects and to help in determining a project’s feasibility. Find an article or press release about a manufacturing company that needed to increase production in anticipation of demand, or that needed to discontinue or restructure a product or product line that became obsolete or unprofitable. In 200 words or more, summarize the article with specificity regarding the product or product line changes. In addition, describe how you believe Management may have used the cost volume profit analysis and other formulas & concepts discussed this week to analyze the appropriate decision for the company to make. Be sure to incorporate several concepts from this week's reading and illustrate how they relate.

Answer 1

Air Land Transport, Inc., a freight forwarding company with more than 50 locations throughout the United States, is considering expansion into a new market. As a first step in the decision-making process, ALTI’s CEO has asked for estimates on sales volumes required from ALTI’s multiple product lines required to achieve break even and to achieve a certain target operating income.

So here we will be looking at different ways of using a CVP analysis in order to make decisions

Cost - Cost is is the unit price to make a product or provide a service.

Volume - it is quantity of production

Profit - Sales - cost which will result in operating profit

Cost-volume-profit (CVP) analysis helps managers make many important business decisions such as what products and services to offer.An accounting analyst for a logistics company is asked to determine whether a possible expansion into a new geographic market can achieve management’s required financial goals.

ALTI :

ALTI started its operations from a single office with just one employee and no clients, to a national company with more than 50 offices, 500 employees and $250,000,000 in revenues. ALTI grew by specializing in the shipment of unusual, time-sensitive freight with special shipping requirements that major freight carriers couldn’t handle well in their large, monolithic shipping systems such as sensitive electronic equipment and high-value medical products.

The freight forwarders were not given the ownership of the trucks but instead they d[pend on trucking and air shipment Companies like ALTI to transport their goods.

ALTI decided to expand its operation worldwide and it has appointed a analyst in analyzing the cost estimates. The analyst based on his accounting expertise has made a proper investigation the business process and how feasible it is to expand the operations. Their first focus was on expanding the operations to Nashville.

The analyst with a proposed pricing list for Factor Medical and estimated monthly shipping volumes, has suggested the following:

The pricing for Factor Medical would not change for the first two years, but that Factor expected a 15% increase in shipping volume in their second year of operations. There could be a lock in prices with ALTI’s Nashville trucking and air cargo vendors for two years, but the costs of operating the new office would increase approximately 2% each year. With all of this data, CEO needed to determine whether ALTI could breakeven in their first year of operations in Nashville, and whether ALTI could make the required $50,000 of operating income in year 2

First calculate the Contribution margin which is nothing but sales - variable cost

Then , Contribution margin multiplied with the sales mix will provide the weighted contribution margin

The average of the contribution margin over the period will give weighted average contribution margin. With the computation of the weighted-average contribution margin, the denominator of the CVP break even formula has been identified. The instructor can the lead a discussion about the total fixed costs of the Nashville operation which belong in the numerator of the formula.

Then once fixed cost is identified and annualized, the CVP break even point will be identified:

CVP break even point = fixed cost/ Weighted average contribution margin

Finally, Margin of safety - Annual CVP will provide the projected annual loss or gain for the year.

Hence when there is a potential amount of loss involved the it is suggested that the expansion should not be made in year . Based on the financial and qualitative factors, the financial position increases the break even and the sales volume only by a small amount, then it is advised to hold on to the decision of expansion into Nashville.