CVP Analysis and Break Even Point
Posted: August 24, 2009 at 11:38 am | Tags:Break Even Point,CVP Analysis
I will utilize this fictional company as an example in each of the post below. My fictional company, Henry’sMiracle Stomach Elixer Co, produces and sells stomach elixir next to the Saint Henry River in Escuintla,Guatemala, a very popular tourist attraction. The bottles are sold to tourists at a stand adjacent to said riverat a price of $7 (American dollars). This water is rumored to cure travelers diarrhea, but only if it is blessedby the local priest, Enrique, who has signed an exclusive contract with this company. Henry, the company’sowner, produces a weekly balance sheet and income statement at the end of each week. We will utilize thefirst week of June of 2009 which starts on a Monday.On the last Friday in May Henry, the company’s owner, produces a balance sheet and income statement fromthe week before. From this exercise Henry records some facts and numbers that will be useful for the nextweek;
Decorative Bottles used to store 8 fl ounces of Henry’s Miracle Stomach Elixir at a cost of $1 each
Decorative String used to decorate the bottles at a cost of .05 each.
Decorative sticky labels that are put on the bottle at a cost of .05 each
Fine print legal disclaimer stickers bought from Henry’s brother, Heinz, the town lawyer at a cost of .75 each.
Bottles of American bottled water at a cost of .50 each purchased from the town import exportexpert, Harry.
Tablets of Loperamide (Imodium) to be dissolved in water at .25 each. Purchased from the towndoctor, Enrico.
$10 a week. Rent for souvenir stand spot in between the public water fountain and the very popularTaco Grande stand.
Raw Materials Beginning Inventory and Cost
1000 decorative bottles
1000 decorative strings
1000 decorative sticky labels
1000 fine print legal disclaimer stickers
1000 bottles of American bottled water
There is never work in process inventory.
Henry buys new raw materials on the 15
of each month
Direct Labor Costs
Henrietta, Henry’s wife, assembles the bottles at .25 cents per bottle.
Enrique, Henry’s son and also the town priest gets paid .25 cents per blessing of one bottle.
Indirect Labor Costs
Harriet , Henry’s daughter gets paid 10.00 a week salary to clean up the assembly work space
Finished Goods Inventory
100 bottles at a cost of $2.60 (direct materials and direct labor) each.
The company’s salesman Heinrick gets paid a commission of .25 a bottle and no salary.