...Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control Case Study – Bridgestone Behavioral Health Center: CVP Analysis for Planning and Control MEMO To: Dr. Thomas Russell, Executive Director, Bridgestone Behavioral Health Center From: Sheryl Marshall, Service Consulting Plus, LLC. Date: 8th September 2014 Subject: Financial performance of Bridgestone Behavioral Health Center over the next one year. Dear Dr. Russell, After having done a detailed study of the projected financial statements for the upcoming year, we have been able to identify a few glaring financial pitfalls the center has to beware of. The center has a lot of government aid provided to it but it also faces a host of challenges as the government has put various limits and caps on its volume and performance. These are the key features to be looked at when analyzing Bridgestone’s financial capabilities:- * The company receives Medicaid from various sources to facilitate its services. Key sources include the state government and certain private pay customers. * The projected budget indicates a certain level of volume which must be achieved for meager profits or breakeven. * The various facilities provided by the company include both on-campus and off-campus services, the major ones being – Group Counselling and Ambulatory Detoxification. The center’s financials show that it is just staying afloat for the past three years, despite exemplary staff performance...
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...Lecture 5: Cost-Volume-Profit Analysis In this module, we are going to discuss a simple concept yet a powerful financial planning and decision-making tool for managers. This concept is called CVP analysis or cost volume profit relationship. Profits are the difference between revenues and costs. Both revenue and cost depend on the volume of operations. So, in the short run whether you make a profit or a loss depends upon the volume of sales you make. What is the unknown for a manager when he or she tries to project profits for future? The managers know the costs and the selling price. So the only unknown is the volume of sales. The importance of CVP analysis flows from the fact that it emphasizes the inter-relationship between costs, volume of sales, and selling price, and therefore it represents a unified picture of all financial information in a simple framework. What effect on profit can American Airlines expect when it adds a new flight on the Dallas Chicago route? How many patient days of care must Dallas Children’s hospital provide in order to cover all of its operating costs? How will the profits for Texas Instruments change if it sells 10% more of its DLP chips? Each of the above questions concerns the effect on cost and revenues when an organization’s activity changes. CVP analysis summarizes the effects of changes in organization’s volume of activities on its costs, revenue and therefore profit. Although the word profit appears in CVP analysis, this analysis...
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...are two types of cost information, variable and fixed costs. Variable costs are costs that change when some variable used in the cost to produce a product changes. For example if you were in the business of producing knives, then the price of the metal used to manufacture those knives would be your variable cost. Another variable cost that has to be accounted for in the cost of manufacturing is labor costs and supply costs. So the variable cost for each knife manufactured would equal the variable cost of metal + the variable cost of labor + the variable cost of supplies. Once you have calculated those costs you can take the total and multiply it by the total number of knives you wish to manufacture and you have your variable cost of knives. Fixed costs are costs that are not dependant on materials used in manufacturing and are dependent on an amount of resource that is required. An example of a fixed cost would be depreciation expense or salaries paid. Cost information can determine many variables in a company, the first variable being pricing of products. In most businesses the market determines the price and supply and demand play a big role in this determination. If supply is low and demand is high the price will most likely be a lot higher than if supply is high and demand is low. Businesses also use cost plus pricing where and organization can set its price according to product cost. Budgeting is also a major factor that accountants use to determine costs and pricing. Budgets...
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...Cost-Volume-Profit (CVP) Analysis Shanica N. Todd-Higgins ACC/561 - ACCOUNTING Instructor: DAVID DUREN Schedule: 06/29/2015 - 08/03/2015 Campus: COLUMBIA SOUTH CAROLINA CAMPUS Group ID: SCMBA0914 CVP - What If Analysis Through research, according to Diane Wicks (2015), “Cost-volume-profit (CVP) analysis is used to assess the impact of potential changes in costs and volume on a company's operating profit and net profit. CVP analysis is also useful in making decisions regarding pricing of products, selection of product lines and utilization of production equipments. Additionally, CVP is at the heart of methods used for calculating the break-even point and sales levels necessary to attain targeted income levels.” The break-even point according to W.D Adkins (2015) is, “the point at which revenues are just enough to cover expenses so there in no profit and no loss.” For instance Calculating Breaking-Even Analysis There are many steps in finding the break even analysis. According to Zari Ballard of Ehow (2015, ), First, calculate the total fixed costs by adding together each of the company's fixed costs. For example, a small company with annual fixed costs of $7,000 in rental payments, $3,000 in equipment leases and $30,000 in administrative salaries would have TFC of $40,000. Next, calculate the contribution margin per unit by subtracting the variable cost per unit from the sales price per unit. For example, if a small company's product sells for $60 per unit with...
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...Dreams (1990) The Wild Life (1984) 2 The Sentinel (2006) Cellular (2004) 8 Mile (2002) L.A. Confidential (1997) The Getaway (1994) Batman (1989) Hard Country (1981) 15.963 [Spring 2007] Managerial Accounting & Control Main Line vs. Basinger Evaluate the defense argument that Mazzocone “has a duty under the law to minimize his loss, and this does not include going out and making a picture knowing you are $2m short. At what stage in the negotiations did Basinger withdraw? If late, it is possible some costs were contractual obligations (such as rights to script) at the time, and these obligations were assumed with the presumption of Basinger participating. Managerial Accounting & Control 3 15.963 [Spring 2007] Main Line vs. Basinger What were Mazzocone’s options following Basinger’s withdrawal? Do not make movie – this assumes all costs sunk. Make with another actress – this assumes some cost recoverability. How does this relate to example in previous class about airline pricing? Evaluate the following claim: “at the time of Basinger’s withdrawal, Mazzocone was faced with a short run decision.” Does loss minimization imply not making the movie, as suggested by the defense? Managerial Accounting & Control 4 15.963 [Spring...
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...Backstreet Dreams (1990) The Wild Life (1984) 2 The Sentinel (2006) Cellular (2004) 8 Mile (2002) L.A. Confidential (1997) The Getaway (1994) Batman (1989) Hard Country (1981) 15.963 [Spring 2007] Managerial Accounting & Control Main Line vs. Basinger Evaluate the defense argument that Mazzocone “has a duty under the law to minimize his loss, and this does not include going out and making a picture knowing you are $2m short. At what stage in the negotiations did Basinger withdraw? If late, it is possible some costs were contractual obligations (such as rights to script) at the time, and these obligations were assumed with the presumption of Basinger participating. Managerial Accounting & Control 3 15.963 [Spring 2007] Main Line vs. Basinger What were Mazzocone’s options following Basinger’s withdrawal? Do not make movie – this assumes all costs sunk. Make with another actress – this assumes some cost recoverability. How does this relate to example in previous class about airline pricing? Evaluate the following claim: “at the time of Basinger’s withdrawal, Mazzocone was faced with a short run decision.” Does loss minimization imply not making the movie, as suggested by the defense? Managerial Accounting & Control 4 15.963 [Spring 2007]...
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...Target Profit And Break Even Analysis; Case 4-33; Managerial Accounting Case 4-33: Cost Structure; Target Profit and Break Even Analysis Question 1: Compute Pittman Company’s break-even point in sales dollars for next year assuming: a. The agents’ commission remains unchanged at 15% $12,000,000 in sales is needed to break even while employing an outside sales force with commissions of 15% of sales. b. The agents’ commission rate is increased to 20% $13,714,286 in sales is needed to break even while employing an outside sales force with commissions of 20% of sales. c. The company employs its own sales force. $15,000,000 in sales is needed to break even while employing the company's own sales force with commissions of 7.5% of sales. Before Pittman Company’s break-even point in sales can be determined, we must initially “reformat” the provided Budgeted Income Statement for the Year Ended December 31 (for the next year) to reflect a Contribution Income Statement format. The reason for this application is to separate the Variable and Fixed costs associated in selling telecommunications equipment to derive pertinent data needed to determine break even sales. The restructuring of each Income Statement may be found in Appendix A of this report. Reformatting the Income Statement allows us to determine first, the Contribution Margin. The Contribution Margin is significant in determining Break-even point whether by the number of units to break even...
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...enterprise successful today may no longer be sufficient next year. A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition. I do agree with the notion of value costing for the 21st Century organizations. Traditional accounting systems distribute indirect costs on the basis of direct labor hours, machine hours, or material costs. This leads to a distorted picture. The costs of products and services must be accurate, or management can be misled. In the last 15 years value costing has been at the forefront for businesses in the 21st century. New cost concepts allocates costs to the things people are doing in companies and assures that these costs are paid by the products that generated them. Virtual enterprise and efficient supply chain management systems will shape the future of these enterprises. Organizations are trying to become agile enterprises with the help of strategic alliances of firms and integration using information technologies. Traditional performance and cost measures are no longer suitable for developing and managing enterprises in the new environment. In order to remain relevant and to add value, cost and performance measures must be designed and systematically evaluated to reduce the often-unnoticed mismatch between strategic goals and operational tactics. Traditional costing systems provide precise, objective, verifiable and good information for external reporting purposes...
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...being the case, he was most likely correct in his claim of clearing out old inventory. The income statement that showed the loss absorbed the cost of the excess inventory at the time of sale. However, when we apply the cost of the excess inventory during the year it was produced, we get a better snapshot of what the sales portion of the business looks like. In 2010 and 2011, the business was producing more than they were selling. This created a higher break-even point which was not met either year. In 2012, since there wasn’t as much produced, there was a lower break-even point and Renton sold 808 units over the break-even point. This level of sales helped to create a contribution margin of 73%, a 21% increase from 2012. Not only was 2012 the most profitable year Renton has seen since they have been in business, it was the first year the company exceeded its break-even point in unit and dollar sales. Zac Dalton is correct in his claims that operations have improved. The company is doing better in unit sales and contribution margin has increased dramatically since he has taken over the business. However, since they sold through their entire inventory, he will have to be sure not to have a repeat of 2010 and continue to increase sales in order to break even in 2013. Sincerely, Rebecca Silva, Accounting Student Analysis for Renton Tractor Company 2010-2012 RevenueVECMUnit CMFEF S&ANOI/L |...
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...BUS5431 - Managerial Accounting Individual Case Study 7-2 FIVE STAR TOOLS James Jiambalvo – Chapter 7 Case 2 Submitted by: K Greene Executive Summary: Five Star Tools is a small family-owned business that manufactures diamond-coated cutting tools (chisels and saws) used by jewelers. The production of these tools involves three major processes. The first of these processes involves steel “blanks” (tools without the diamond coating) that are cut to size. The second process involves the blanks being sent to a chemical bath that prepares the tools for the coating process. The final process is the major process in the line. The blanks are coated with diamond chips in a proprietary process that simultaneously coats and sharpens the blade of each tool. Following the coating process, each tool is inspected and defects are repaired or scrapped. In the past two years, the company has experienced significant growth and with that growth has come some growing pains. The company finds itself at capacity in the coating and sharpening process. This process requires highly skilled workers and expensive equipment. Because of growth a bottleneck has been created by this operational process and this in turn has cause the company to miss delivery deadlines on orders from several important customers. Maxfield Turner, the son of Frederick Turner, founder of Five Star Tools, president of the company is having a discussion over lunch with Betty Spence, vice president of marketing...
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...BGI COURSE SYLLABUS |Course Number and Title |MGT 553 Finance, Accounting, and the Triple Bottom Line I | | | | |Instructors |Kate Lancaster, PhD, CPA | | |kate.lancaster@bgi.edu | | |(W) 805.756.2922, (H-MB) 805.772.7452 | | |(H-BI) 206.780.1015, (C) 805.440.4618 | | |Toni Smith, PhD, CPA | | |toni.smith@bgi.edu | | |603.659.5108 | | |Brian Setzler, MBA, CPA | | ...
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...Bridgestone Health Center: Cost-Vume-Profit(CVP) Analysis for Planning and Control A business Case Presented to the Accountancy Department De La Salle University In partial fulfillment Of the course requirements In MODMGT1 Submitted to: Ms. Katherine Chua Submitted by: Ferrer, Jan Alyssa Dennise Madamba, Ann Tan, Baron Vergara, Maria FRancesca In the vast changing business environment, organizations have kept a single grip trying to cope up with the differing demands required from them. Stability has been the rising issue; hence business continuance is put to test. Questions such as, “will my revenue match up with my cost?” or “Do my business profit from this?” These issues do not only involve profit generating entities but non-profit organizations as well. It is a common mistake that non-profit organizations are supposedly to earn just enough to compensate for the expenses incurred. But, truth is, non-p[profit organizations, need as surplus to survive the demands of a business. This would equip these nonprofit organizations from future contingencies and problems. In the business case provided, Bridgestone Behavioral Health Center, is a non-profit rehabilitation hospital. The said entity caters patients suffering from drug or addiction. The entity has a varied services offering to both checked-in patients and Out-patients. The said services are as follow: Patient Assessment, Lab Urinalysis, Case , Group Counseling, Individual Counseling, Crisis, Intensive Medical Somatic...
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...Break-even analysis, the construction of break-even charts, and the related cost-volume- profit analysis is an area of accounting that provides management with relevant data. Discuss management’s use of this data for purposes of profit planning, policy formulation, and decision-making. It is essential to a business’s going concern that management executes proper profit planning, policy formulation and decision making. This is achieved with the help of tools such as cost-volume-profit (CVP) and break-even analysis. Break-even analysis determines the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point to ensure that profitability is maintained. The information used to determine and analyze the breakeven point includes fixed, variable and total costs and the associated sales revenues. A breakeven chart is a strategic tool used to plot the financial revenue of a business unit against time or sales to determine the point when sales output is equal to revenue generated. This is recognized as the breakeven point. It analyses the relationship between fixed and variable costs and to predict the effect on profitability of changes to those costs. The concept of CVP analysis examines the relationship among factors that impact on profits such...
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... Cost Classification…………………………………………………………………2 Cost Volume Profit analysis……………………………………………………….2 Contribution Margin……………………………………………………………….2 Gross Margin and Contribution Margin…………………………………………...3 CVP Relationship in Graphic Form……………………………………………….3 CM Ratio. …………………………………………………………………………3 Application of CVP Concepts……………………………………………………..4 Importance of CM…………………………………………………………………4 Break-even Analysis………………………………………………………………4 Target Profit Analysis…………………………………………………………….5 The Margin of Safety……………………………………………………………..6 Degree of Operating Leverage…………………………………………………....6 Major Assumptions of CVP Analysis…………………………………………….7 Difference between Variable Costing and Absorption Costing………………………………………………………………7 Cost-Volume-Profit Relationship A. Cost Classification: 1. Variable Costs--variable costs are those costs that vary proportionately with changes in the level of activity (such as direct materials, direct labor, salesmen’s commissions, etc.) a) Relevant Range--even though variable cost per unit may vary throughout the entire range of possible activity, the variable cost per unit is assumed to remain constant over the range of activity over which the business expects to operate. 2. Fixed Costs--fixed costs are those costs that do not change with changes in the level of activity (such as depreciation, property taxes, executive salaries, etc.) a) Relevant Range-even though fixed costs may vary...
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...Discovery Driven Planning Proprietary Material © K.E. Homa So, what’s the problem? • When evaluating the financial attractiveness of ‘opportunities’, most companies do detailed financial projections going out 3, 5, or 10 years ... or more. • The financial projections are usually driven by ‘point estimates’ of demand (or sales) that are built on layers of assumptions and, thus, are difficult to forecast with any reasonable degree of precision. • So, the financial projections themselves – while confidence building (perhaps) – are always imprecise … and often flat-out wrong ! Discovery Driven Planning to the rescue … Classic publication: 1995 … frequent re-publication and referrals Discovery Driven Planning Basic Premises • Developing a forecast is harder than validating or refuting one (i.e. “over or under” likelihood) So, work backwards … determine how much you to have to sell to meet financial hurdles … and then ask yourself: “Can we do it ?” • Over time, learning occurs (i.e. “discovery”) and assumptions can be validated, refined, or refuted. So, start with ‘what you know’, keep a list of what you don’t know, and refine your estimates when you know more Discovery Driven Planning Basic Premises • Developing a forecast is harder than validating or refuting one (i.e. “over or under” likelihood) So, work backwards … determine how much you to have to sell to meet financial hurdles … and then ask yourself: “Can we do it ?” • Over...
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