Question d

Report

To: Sales Manager of Brunswick Sdn Bhd

From: Management Accountant

Date: December 2019

Subject: Performance management issues of Brunswick Sdn Bhd

Introduction

This report helps on deciding on the proposal to adopt in order to improve the performance of
company especially for the profits. Besides, it also discusses the uses of cost-volume-profit
analysis. It states the managerial uses of the analysis in decision making. Other than that, it
also discusses the limitations and advantages of cost-volume-profit analysis.

(i) Based on the Proposal 1, total fixed cost is RM247,500, variable cost per tonne is
RM275, selling price per tonne is RM500. Based on the breakeven chart, the BEP
will be valued at RM550,000 which is 2100 tonnes of barrel. It shows that when it
reached the BEP, the total sales revenue will be equal with total costs where our
company will make neither a profit nor a loss. It indicates that when our company
sold the barrel below 1100 tonnes, our company will make losses, vice versa.

Based on the Proposal 2, total fixed cost is RM247,500, variable cost per tonne is
RM315, selling price per tonne is RM450. Based on the breakeven chart, the BEP
will be valued at RM825,000 which is 1833 tonnes of barrel. It shows that when it
reached the BEP, the total sales revenue will be equal with total costs where our
company will make neither a profit nor a loss. It indicates that when our company
sold the barrel below 1100 tonnes, our company will make losses, vice versa.

Based on Proposal 1 and Proposal 2, the suitable proposal that would be adopted
by Brunswick will be Proposal 1. The reason why I would recommend adopting
Proposal 1 because the BEP of Proposal 1 is lower which is 1100 tonnes
(RM550,000) compared with Proposal which is 1833 tonnes (RM825,000). It
means that under Proposal 1, Brunswick only need to produce 1100 tonnes of
 barrel to breakeven while under Proposal 2, 1833 tonnes of barrel need to produce
to breakeven. Besides, the variable cost per tonne of Proposal 1 is lower which
cost RM275 per tonne compared with Proposal 2 which is RM315 per tonne. The
lower cost will enable the company to maximize the profits. The main factor
affecting both proposals is variable cost. The increase or decrease of variable costs
is depends on the company’s output. In the calculation of Proposal 2, the variable
cost per tonne increase by RM40, the total variable costs will affect the net profit
in the income statement. The higher the variable costs, the lower the profits will
be. Moreover, the selling price of Proposal 1 is higher which is RM500 per tonne
compared with Proposal 2 which is RM450 per tonne. When the selling price is
higher, the more tonnes of barrel sold, the more the profits will earn compared
with Proposal 2.

In short, Proposal 1 will be more suitable proposal to be adopted by Brunswick to

maximize the profits compared with Proposal 2.

(ii) CVP analysis is an essential use for the profit planning of a company. Profit
planning is a systematic approach of determining the effect of management’s
plans upon the company’s profitability. (Profit Planning: Concept and
Fundamentals | Financial Management) Costs are important inputs in profit
planning, CVP analysis can help management to understand the relationship
between cost, volume and profit. CVP analysis is useful in making short-run
decisions such as making decisions on the sales volume and production volume.
For example, CVP analysis helps sales managers to determine the number of units
a company should sell to achieve target profit. As a result, under the assistance of
CVP analysis, sales managers can decide whether to increase or decrease the
production of a product in order to achieve company’s objectives. Therefore, CVP
analysis used in profit planning can help sales managers in making decisions that
benefit the company.

CVP analysis is used in decision making in setting products or services price.

Pricing strategy is the strategy used by a company to price their products. (Suttle,
2019) Different pricing strategies are used by a company and most pricing
strategies are affected by cost, competitors, and customers. Company sets the
 product price based on the cost of production. If the product price is set lower than
the cost of production, the company may have to suffer the loss. (Factors
Affecting Pricing Decisions) However, cost of production can be reduced by
controlling the activities level of production.  As a result, when the cost of
production is reduced, the company can reduce the product price accordingly
which is an advantage against the competitors. Under the assistance of CVP
analysis, sales managers can better understand the effect on sales volume and
profit if they reduce the cost to make effective and efficient decisions.

CVP analysis is also used in budget control of a company. Budget control is a

process of preparing budgets for the future period and comparing the budget
standard with the actual performance. (Budget Control |Concept| Types |
Advantages | eFinanceManagement.com) Budget control is important because it
helps to prevent the spending excesses that will impact the company’s profit.  By
using CVP analysis, sales managers can compare the sales budget, volume, cost,
and actual profit. Thus, sales managers can find out the differences between
budgeted and actual performance to carry out corrective actions. Therefore, CVP
analysis used in budget control can assist sales managers to make effective and
efficient decisions.

(iii) The advantage of using cost-volume-profit analysis for the company is operating
leverage benefit. It can be explained how the cost structure for a company is made
up of fixed cost processes which means shifts a variable cost to a fixed cost as the
company’s manager may have some authority over the cost structure. For
example, the company purchases a new automated equipment that can save the
variable labour costs. Besides, the cost structure is a direct relationship to the level
of growth and profits in the company. Thus, a company with the higher proportion
of fixed costs in its cost structure will have higher operating leverage as it
produces a high contribution margin which means the differences between sales
and variable costs. Same to the higher fixed sales also mean that the company
obtains a high break-even point. A high break-even point indicates the financial
success of the company as the company can claim high profits at a much higher
rate. (Francis, 2013) This is because if a company is near its break-even point,
even though the sales increase in a small percentage, it can yield large percentage
 increases in profits. For example, the degree of operating leverage is 4, then a 5%
increase in sales would translate into a 20% (4 x 5%) increase in profits.

Another advantage of using cost-volume-profit analysis is the company can set a

realistic and achievable target for the business. By using CVP analysis, it gives an
understandability of the number of units to be sold or the amount of revenue to be
generated for covering the cost incurred in the product and achieving the
profitability. Thus, the company is more aware of the profits that the company can
earn at various points via the break-even chart prepared by the CVP analysis.
(Luenendonk, 2019)

Next, the advantage of cost-volume-profit analysis is that the calculations of CVP

analysis are simple and quick, it may give a quick estimation for company’s sales
to earn certain profits in the subsequent years. This is because CVP analysis uses a
standard set of formulas that work for all the analysis methods and so managers
can put those figures and data into the formulas in order to determine the effect of
hypothetical changes in these variables. Thus, CVP analysis is a useful analysis
method for the owners of business who just start a new business or lack a strong
accounting background. (Freedman, n.d)

Conclusion

In conclusion, Proposal 1 will be more suitable for Brunswick Sdn Bhd to be adopted to
maximize the profits as it gives lower variable costs and higher selling price compared with
Proposal 2. Besides, there are also some of the managerial uses of CVP analysis that stated
above as well as the limitations and advantages of the CVP analysis.

Thank you.

Management Accountant,

(1372 words)