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RE: CVP Analysis

Deangela Dixon

11/11/2012 4:12:07 AM

According to our text (p.184) CVP focuses on how profits are affected by five factors: 1. Selling prices. 2. Sales volume. 3. Unit variable costs. 4. Total fixed costs. 5. Mix of products sold. CVP analysis helps managers understand how profits are affected by the key five factors listed above. It is a vital tool in business decisions. The decisions include what products and services to offer, what prices to charge, what marketing strategy to use, and what cost structure to maintain.CVP Analysis is a way to quickly answer a number of important questions about the profitability of a company's products or services. An example of CVP will usually involve businesses that produce products. The breakeven point is the point of balance between making a profit or a loss. Reaching the break-even point is the first major step towards profitability. According to this website, The break-even point is the point where the businesss sales have generated enough income to cover all of its fixed costs and expenses. At that point, all of the businesss incoming revenue is profit as long as the expenses and costs are not increased and the sales amounts are not reduced. Breakeven is an important concept in managerial accounting because it explains the relationship between cost, production, volume and returns. It can be extended to show how changes in fixed cost, variable cost, commodity prices, revenues will effect profit levels and break even points. Break even analysis is most useful when used with partial budgeting, capital budgeting techniques. The major benefits to use break even analysis is that it indicates the lowest amount of business activity necessary to prevent losses.

Breakeven uses are to determine changes in profits when the staff is contemplating making changes in product prices. It also seeks to find the quantity of output that just covers all costs so that no loss is generated. Managers can determine the minimum quantity of sales at which the company would avoid a loss in the production of a given good.

RE: BreakEven Analysis

Deangela Dixon

11/16/2012 7:13:57 AM

Breakeven point in units and dollars: 25 = 15 + 10 25 - 15 = 10 units Units sold to breakeven: 50,000/10 = 5,000 units Revenue (dollars) to breakeven 5,000 x 25 = $125,000

RE: Benetton Group

Deangela Dixon

11/11/2012 4:42:23 AM

1.The income statement on page 33 is prepared using a contribution format. The income statement on page 50 is prepared using a absorption format. The annual report says that the contribution format income statement shown on page 33 is used for internal reporting purposes in the annual report. The contribution format income statement treats all cost of sales as variable costs. The selling, general and administrative expenses shown on the absorption income statement have been broken down into variable and fixed components in the contribution format income statement.The Distribution and Transport expenses and the Sales Commissions have been reclassified as variable selling costs. 2. The cost of sales is included in the computation of contribution margin because the Benetton Group designs, markets, and sells apparel. The manufacturing of the products is outsourced to various suppliers. Benettons cost of sales are variable therefore the cost of sales is included in the calculation of contribution margin.
Deangela Dixon 11/13/2012 3:48:10 AM

Under Italian GAAP, long-lived assets are subject to impairment tests when circumstances indicate that a permanent impairment may exist. In determining whether permanent impairments exist, the Company groups its assets at the country level of identifiable cash flows. If the carryingamount of an asset (or asset group) exceeds its fair value, which is generally measured based on discountedcash flows, an impairment loss is recognized in an amount equal to the difference.Due to the fact that measuring for impairment under Italian GAAP is on a country level versus at the store value level under U.S. GAAP, impairment under U.S. GAAP results in a greater impairment amount.Under U.S. GAAP, long-lived assets are subject to periodic impairment tests when circumstances indicate that an impairment may exist. In determining whether impairments exist, the carrying value of the asset is compared to the undiscounted cash flows associated with the asset. The Company groups its assets at the lowest level of identifiable cash flows, at store level, consistent with the approach that management reviews the business. Only if an assets (or asset groups) carrying amount exceeds the sum of the undiscounted cash flows that are expected to be generated from the use and eventual disposition of the asset, an impairment loss is recognized in an amount equal to the amount by which the assets carrying amount exceeds its fair value, which is generally measured based on discounted cash flows. Longlived assets are reported at the lower of carrying amount or fair value. pdf Retrieved November 13, 2012.

RE: Benneton Break-Even

Deangela Dixon

11/15/2012 3:17:54 AM

Modified:11/15/2012 3:18 AM (in millions; figures are rounded) Total fixed costs............................................ Contribution margin ratio.............................. Breakeven in euros........................................ 2003 464 0.374 1,241 2004 436 0.387 1,127

The break-even point in 2004 is lower than in 2003 because Benettons fixed costs in 2004 are lower than in 2003 and its contribution margin ratio in 2004 is higher than in 2003.

RE: Question 4

Deangela Dixon

11/16/2012 11:26:08 AM

Modified:11/16/2012 11:27 AM

This is my calculation. 4. The target profit calculation is as follows:

(in millions; figures are rounded) Total fixed costs + target profit................................... Contribution margin ratio............................................. Sales needed to achieve target profit...........................

2004 736 0.387 1,902