# CVP and Financial Statements for a Mega-Brand Company

2-48 CVP and Financial Statements for a Mega-Brand Company for \$11 Only (Instant Download)

Procter & Gamble Company is a Cincinnati-based company that produces household products under brand names such as Gillette, Bounty, Crest, Folgers, and Tide. The company’s 2006 income statement showed the following (in millions):

 Net sales \$68,222 Costs of products sold 33,125 Selling, general, and administrative expense 21,848 Operating income \$13,249

Suppose that the cost of products sold is the only variable cost; selling, general, and administrative expenses are fixed with respect to sales. Assume that Procter & Gamble had a 10% increase in sales in 2007 and that there was no change in costs except for increases associated with the higher volume of sales. Compute the predicted 2007 operating income for Procter & Gamble and its percentage increase. Explain why the percentage increase in income differs from the percentage increase in sales.

2-61 CVP in a Modern Manufacturing Environment

A division of Hewlett-Packard Company changed its production operations from one where a large labor force assembled electronic components to an automated production facility dominated by computer-controlled robots. The change was necessary because of fierce competitive pressures.

Improvements in quality, reliability, and flexibility of production schedules were necessary just to match the competition. As a result of the change, variable costs fell and fixed costs increased, as shown in the following assumed budgets:

 Old Production Operation New Production Operation Unit variable cost Material \$0.88 \$0.88 Labor \$1.22 0.22 Total per unit \$2.10 \$1.10 Monthly fixed costs Rent and depreciation \$450,000 \$875,000 Supervisory labor 80,000 175,000 Other 50,000 90,000 Total per month \$580,000 \$1,140,000

Expected volume is 600,000 units per month, with each unit selling for \$3.10. Capacity is 800,000 units.

1. Compute the budgeted profit at the expected volume of 600,000 units under both the old and the new production environments.
2. Compute the budgeted break-even point under both the old and the new production environments.
3. Discuss the effect on profits if volume falls to 500,000 units under both the old and the new production environments.
4. Discuss the effect on profits if volume increases to 700,000 units under both the old and the new production environments.
5. Comment on the riskiness of the new operation versus the old operation.

2-65 CVP and Break-Even

Goal: Create an Excel spreadsheet to perform CVP analysis and show the relationship between price, costs, and break-even points in terms of units and dollars. Use the results to answer questions about your findings.

Scenario: Phonetronix is a small manufacturer of telephone and communications devices. Recently, company management decided to investigate the profitability of cellular phone production. They have three different proposals to evaluate. Under all the proposals, the fixed costs for the new phone would be \$110,000. Under proposal A, the selling price of the new phone would be \$99 and the variable cost per unit would be \$55. Under proposal B, the selling price of the phone would be \$129 and the variable cost would remain the same.

Under proposal C, the selling price would be \$99 and the variable cost would be \$49. When you have completed your spreadsheet, answer the following questions:

1. What are the break-even points in units and dollars under proposal A?
2. How did the increased selling price under proposal B impact the break-even points in units and dollars compared to the break-even points calculated under proposal A?
3. Why did the change in variable cost under proposal C not impact the break-even points in units and dollars as significantly as proposal B did?

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Answer of 2-48 CVP and Financial Statements for a Mega-Brand Company

 2006 2007 Comments Net Sales 68,222 75,044 Increase of 10% from 2006 Less: Cost of Product Sold 33,125 36,438 Increase of 10% from 2006 Contribution 35,097 38,607 Less: Selling and General 21,848 21,848 Fixed cost no change in dollar amount Operating income 13,249 16,759 Percentage increase in operating income (16,759- 13,249)/13,249 26.5%

Due to the fact that fixed cost of general selling and administration has not increased with the increase in sales the profit has been increased by 26.5 percent as compared to 10 percent increase in sales.

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