FINANCIAL AND COST-VOLUME-PROFIT MODELS

Oleh CAHYO PRIYATNO, SE, AK, CPMA, CA1

Financial Modeling Quantitative simulation of relations among various factors Allows the organization to assess what if scenarios to support Decision making Forecasting Cost-Volume-Profit Models Illustrates the relationship between sales volume, costs and revenues Based on variable (direct) costing Sales variable costs = contribution margin Each additional unit sold contributes that amount to the bottom line Breakeven point is reached when total contribution equals total fixed costs Example Sales price = $100 Variable cost per unit = $40 Total fixed cost = $36,000
$36,000 + 0 = 600 units $60/unit
$180,000

Revenue and costs

$160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0

Unit sales
Fixed cost Total cost Revenue

Income tax effect Desired profit in basic model assumes no income taxes Obviously, more units must be sold if taxes must be paid on the profits Adjustment to basic model Unit sales = Contribution margin can be used to make scarce resource allocation decisions Goal is to maximize the amount of income that can be generated

Global Financial Controller PT. Moga International, Mahasiswa Magister Akuntansi Terapan (MAKSI) Universitas Gajah Mada, Independent Advisor , dan Anggota Utama Ikatan Akuntan Indonesia

0 00 1,1 00 1,2 00 1,3 00 1,4 00 1,5 00 1,6 00 1,0

0 60

0 70

10

20

30

40

50

80

90

 How to best use the scarce resource? Determine the contribution per unit of the scarce resource Can only consider one resource at a time
Sales price Variable cost/unit Contribution margin Units of scarce resources required for each unit of product Contribution margin per unit of scarce resource Product A Product B Product C Product D $ 100 $ 210 $ 380 $ 450 72 90 200 210 $ 28 $ 120 $ 180 $ 240

2 $ 14 $

5 24 $

6 30 $

12 20

What is the best use of 300 units of the resource?

Multiple product situations Basic model assumes only one product Multiple product situation replaces the contribution margin per unit with the weighted average contribution margin Based on the normal relative sales volumes of the products Resulting units to sell is then divided among the products in their original proportions
Selling Product price Folders $ 1.00 Binders 5.00 Portfolios 20.00 Var.cost per unit $ 0.40 2.20 12.00 CM per unit $ 0.60 2.80 8.00 Relative Weighted sales CM per unit 60% $ 0.36 30% 0.84 10% 0.80 $ 2.00 $ 100,000 $ 10,000

Fixed cost Desired profit

Product Folders Binders Portfolios

Relative sales 60% 30% 10%

Total sales 55,000 55,000 55,000

Units of product 33,000 16,500 5,500

CM per unit $ 0.60 2.80 8.00

Total CM $ 19,800 46,200 44,000 $ 110,000

$100,000 + 10,000 $2.00/unit

= 55,000 units

Operating leverage Companies with relatively low variable costs per unit, but high fixed costs, experience greater swings in profitability with volume changes than do companies with high variable costs and low fixed costs Operating leverage is a multiplier % in sales * operating leverage = % in income

 A 10% increase in sales will result in a 70% increase in Company As income, but only a 40% increase in Company Bs
Sales Variable costs Contribution margin Fixed costs Operating income New operating leverage Company A $ 1,100,000 330,000 $ 770,000 600,000 $ 170,000 4.53 Company B $ 1,100,000 660,000 $ 440,000 300,000 $ 140,000 3.14

Multiple Driver Models

CVP model assumes all costs are either variable and driven by sales, or fixed In reality, costs and revenues have many different drivers ABC-based model should be more accurate Considers the major drivers of costs

Sensitivity Analysis
Model inputs are estimates, actual results may vary considerably Sensitivity analysis plays what if with the inputs Changes in volume of cost and revenue drivers How much will the income be affected by other scenarios?

Theory of Constraints
Identification and best use of bottlenecks Bottleneck is anything that prevents the company from producing and selling more Process: machine capacity, available labor Policy: no weekend or overtime work Resource: shortage of materials Market: not enough demand for product

Product A Product B Product C Process 1 Capacity: 12/hour Process 2 Capacity: 4/hour Process 3 Capacity: 6/hour Process 4 Capacity: 5/hour

 Step 1: Identify appropriate value measure Usually throughput Step 2: Identify bottlenecks Work piling up, unused capacity, etc. Step 3: Optimize the bottleneck What will produce the greatest value? Step 4: Adjust process to bottlenecks needs Produce only what is needed by the bottleneck Step 5: Alleviate the bottleneck Add capacity, demand, etc. Step 6: Repeat steps 1-5 Eliminating one bottleneck creates another

Product A Product B Product C Throughput per unit Daily demand Minutes req'd per unit Process 1 Process 2 Process 3 Process 4 Throughput per minute of Process 2 Produce Process 2 minutes used $ 28 14 $ 120 10 $ 180 15 Total minutes required 375 560 177 313

5 10 3 7

8 15 6 8

15 18 5 9

2.80 6 60

8.00 10 150

$ 10.00 15 270

Total used 480