Cost-Volume-Profit Analysis of Daphne International Holdings Limited (DIHL)

This article provides a detailed analysis of DIHL's budgeted net profit, breakeven point, margin of safety, and projected fluctuations in variable costs and selling costs. The analysis is based on a research project conducted by a student of City University of Hong Kong on cost-volume-profit analysis of DIHL's shoe manufacturing branch. The article includes computations and explanations for each requirement of the project.

BBAC501 Group Assignment-18T3
Assignment
Eliana is a student currently completing her Bachelor of Science in Computational Finance at
the City University of Hong Kong (CityU). In her final year, she is required to conduct a
small research project in the field of accounting covering any area of her interest. After
consulting with her lecturer, Eliana decided to focus on cost-volume-profit analysis and
picked Daphne International Holdings Limited (DIHL) as her case company. DIHL is a Hong
Kong-based investment holding company, who is also one of the largest shoe manufacturers
in China. The Company operates through several segments, including the sales of footwear
products under Daphne and Shoe Box and other brands; the manufacturing of fashion and
accessory products; and the e-commerce businesses through its subsidiaries. The Company
mainly operates its businesses in China, Asia, Europe and North America. For the purpose of
her research, Eliana decided to focus on the shoe manufacturing branch by taking three
sample products and denoted them as ‘Shoe-A’, ‘Shoe-B’ and ‘Shoe-C’.
Eliana obtained budgeted annual data for 2018 from the finance department of DIHL.
Budgeted sales volume for the year includes 4,500 pairs of shoes each for Shoe-A and Shoe-
B while that of Shoe-C is 6,000 pairs. Budgeted fixed costs for the year comprise of $189,500
for manufacturing and $80,000 for selling and administrative costs. The tax rate applicable
for DIHL in Hong Kong is 30 per cent. Additional budgeted total annual data for the three
products for the year 2018 is presented as follows.
Required: You are hired as a part-time research assistant to help Eliana address the
following requirements (treat each requirement independently, show all computations
and explain your results).
Part 1
Determine DIHL's budgeted net profit for the year 2018. (Hint: use contribution margin
approach to income statement or variable costing statement). 3 Marks
Answer 1
Sl No Particular Shoe-A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Variable Manufacturing Cost 360000 405000 660000 142500
0
3 Variable Selling Cost 112500 90000 210000 412500
4 Budget Sales Quantity 4500 4500 6000 15000
5 Contribution (1-2-3) 67500 135000 210000 412500
6 Fixed Cost
-Manufacturing Overheads 189500
-Selling Overheads 80000
7 Profit Before Tax (5-6) 143000

8 Tax (7*30%) 42900
9 Net Profit (7-8) 100100
The above computation has been carried out by Using formula of Sales less variable cost i.e.
contribution. Further, contribution is reduced by Fixed Cost to give profit before tax. Post
that, tax has been deducted on profits @30% as stated in the details given above to give net
profit by manufacturing shoes.(Anon., n.d.)
Further, fixed cost has not been allocated over different grade of shoes as the question states
about DIHL’s budgeted profitability and not on profit of individual shoes. Accordingly, the
budgeted profit of the company stands at AUD 100,100/-.
Part 2
Assuming the sales mix remains constant though out 2018, determine how many pairs of
shoes must be sold for each type in order to breakeven. 4 Marks
Answer 2
Sl No Particular Shoe-
A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Per Unit Sales Price (1/7) 120 140 180
3 Variable Manufacturing Cost 360000 405000 660000 142500
0
4 Per Unit Variable manufacturing Cost
(3/7) 80 90 110
5 Variable Selling Cost 112500 90000 210000 412500
6 Per Unit Variable Selling Cost (5/7) 25 20 35
7 Budget Sales Quantity 4500 4500 6000 15000
8 Contribution (1-3-5) 67500 135000 210000 412500
9 Per Unit Contribution (8/7) 15 30 35
10 Sales Mix (4500:4500:6000) 3 3 4 10
11 Contribution under sales mix (9*10) 45 90 140 275
12 Fixed Cost
13 -Manufacturing Overheads 189500
14 -Selling Overheads 80000
15 Total Fixed Cost 269500
16 Break Even quantity (15/11)*10 9800
17 Number of pairs to be ordered 2940 2940 3920 9800
On perusal of the table, one can understand that breakeven sales for the company stands at
9800 units based on sales mix computed above. The formula for computation of breakeven
quantity has been provided here-in-below(WebFinance Inc, 2018)
(Fixed Cost of company/ Contribution as per sales mix)* Sales Mix Quantity.

Further, sales mix has been derived by taking ratio of budgeted sales quantity provided in
question.
In addition contribution per unit has been derived by computing contribution per grade of
shoe divided by total budgeted sales quantity of such grade.
Post the aforesaid; the breakeven quantity has been allocated over each grade on the basis of
sales mix. Thus, the break-even sales of each shoe grade is 2940, 2940 and 3920 units for A,
B and C respectively.
Part 3 (A)
Calculate the projected safety margin in units for the year 2018 and explain the importance of
such information for DIHL
Answer 3(A)
Sl No Particular Shoe-
A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Per Unit Sales Price (1/7) 120 140 180
3 Variable Manufacturing Cost 360000 405000 660000 142500
0
4 Per Unit Variable manufacturing Cost
(3/7) 80 90 110
5 Variable Selling Cost 112500 90000 210000 412500
6 Per Unit Variable Selling Cost (5/7) 25 20 35
7 Budget Sales Quantity 4500 4500 6000 15000
8 Contribution (1-3-5) 67500 135000 210000 412500
9 Per Unit Contribution (8/7) 15 30 35
10 Sales Mix (4500:4500:6000) 3 3 4 10
11 Contribution under sales mix (9*10) 45 90 140 275
12 Fixed Cost
13 -Manufacturing Overheads 189500
14 -Selling Overheads 80000
15 Total Fixed Cost 269500
16 Break Even quantity (15/11)*10 9800
17 Number of pairs to be ordered 2940 2940 3920 9800
18 Margin of Safety Units (7-17) 1560 1560 2080 5200
On perusal of the above table, one can understand that margin of safety in unit’s stands at
5200 units. The same has been further allocated over the grades on the basis of sales mix and
accordingly the sales of each grade under margin of safety stands at 1560, 1560 and 2080
units for A, B and C respectively.(Anon., 2018)

Further, margin of safety units have been computed using the formula provided here-in-
below:
Total Budgeted sales Quantity-Break Even Sales Quantity.
Further, the importance of margin of safety has been described here-in-below
(a) It helps to analyse the management regarding the decline in sales of quantity which can
lead to break-even;
(b) It helps in decision making regarding expansion in sales;
(c) Higher Margin of Safety is indicative of chances of profitability being high;(Accounting
For Management, 2018)
Part 3 (B)
Compute the projected safety margin in sales dollars for the year 2018 and interpret what your
answer means to DIHL. 2 Mark
Answer 3(B)
Sl No Particular Shoe-
A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Per Unit Sales Price (1/7) 120 140 180
3 Variable Manufacturing Cost 360000 405000 660000 142500
0
4 Per Unit Variable manufacturing Cost
(3/7) 80 90 110
5 Variable Selling Cost 112500 90000 210000 412500
6 Per Unit Variable Selling Cost (5/7) 25 20 35
7 Budget Sales Quantity 4500 4500 6000 15000
8 Contribution (1-3-5) 67500 135000 210000 412500
9 Per Unit Contribution (8/7) 15 30 35
10 Sales Mix (4500:4500:6000) 3 3 4 10
11 Contribution under sales mix (9*10) 45 90 140 275
12 Fixed Cost
13 -Manufacturing Overheads 189500
14 -Selling Overheads 80000
15 Total Fixed Cost 269500
16 Break Even quantity (15/11)*10 9800
17 Number of pairs to be ordered 2940 2940 3920 9800
18 Margin of Safety Units (7-17) 1560 1560 2080 5200
19 Per Unit Sales Price (1/7) 120 140 180 440
20 Margin of Safety Sales(18*19) 187200 218400 374400 780000

On perusal of above table, one can understand that margin of safety in terms of value stands
at AUD 780,000 representing near about 35% of sales volume which is good for future
prospect of the company. The margin of safety has been computed by multiplying individual
grade margin of safety quantity with the budgeted sales price. Accordingly, the margin of
safety sales stands at AUD 187,200, 218,400 and 374,400 for A, B and C respectively.
The above result implies that if the sales of the company fall by 35% then the company shall
reach its break-even situation (Assuming variable cost fall with same proportion. Further, it
also shows that DIHL is in a solid position and a margin of safety at high level indicates
higher profitability of company. Thus, in short Margin of Safety sales at 35% of budgeted
sales indicates solid position of company.(Simister, 2013)
Part 4 (A)
After submitting his research paper, Eliana got an email from the accountant at DIHL
advising him the expected fluctuations that he has to note and include in a separate analysis.
Variable manufacturing cost of Shoe-A would increase by 12 per cent, and the variable
selling cost of Shoe-C is expected to increase by $5.00 per pair of shoes. However,
management at DIHL have decided not to change the selling price of the products.
Taking into accounting the above change of circumstances, determine how many pairs of
each shoe would DIHL have to sell in order to break even in the year 2018. 3 Marks
Answer 4(A)
Sl No Particular Shoe-
A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Per Unit Sales Price (1/7) 120 140 180
3 Variable Manufacturing Cost 403200 405000 660000 146820
0
4 Per Unit Variable manufacturing Cost
(3/7) 89.6 90 110
5 Variable Selling Cost (6*7) 112500 90000 240000 442500
6 Per Unit Variable Selling Cost 25 20 40
7 Budget Sales Quantity 4500 4500 6000 15000
8 Contribution (1-3-5) 24300 135000 180000 339300
9 Per Unit Contribution (8/7) 5.4 30 30
10 Sales Mix (4500:4500:6000) 3 3 4 10
11 Contribution under sales mix (9*10) 16.2 90 120 226.2
12 Fixed Cost
13 -Manufacturing Overheads 189500
14 -Selling Overheads 80000
15 Total Fixed Cost 269500
16 Break Even quantity (15/11)*10 11914

17 Number of pairs to be ordered 3576 3576 4768 11920
On the basis of details provided in the above stated question required alteration in the
projection has been made, thus, one can see that breakeven quantity of the company has
increased from 9800 units to 11914 units (11920 units to be in alignment with sales mix) on
account of change in contribution per unit for two grades of shoes. Further, the Contribution
on the basis of sales mix has also changed from 275 to 226.2 resulting in increase in break-
even quantity which is not good for the company.
Accordingly, the break-even quantity has been allocated over different grade of shoes on the
basis of sales mix. Thus, the break-even quantity for grade A, B and C stands at 3576, 3576
and 4768 units.
Part 4 (B)
Assume the maximum demand for each type of shoe could reach 6000 pairs for 2018.
However, the realistic estimate of maximum total number of shoe pairs that DIHL can
produce is 17,000 due to limited financial resources. The company is desperate to maximise
its profitability for 2018 by manipulating its sales mix. For this reason, the accountant at
DIHL has asked you to propose the relative sales mix (or proportion) of each product that the
company should sell. Provide explanation for your proposed answer. 4 Marks
Answer 4(B)
For answering these question details presented in part 4(a) has been used.
Sl No Particular Shoe-
A Shoe-B Shoe-C Total
1 Budgeted Sales Volume 540000 630000 108000
0
225000
0
2 Per Unit Sales Price (1/7) 120 140 180
3 Variable Manufacturing Cost 403200 405000 660000 146820
0
4 Per Unit Variable manufacturing Cost
(3/7) 89.6 90 110
5 Variable Selling Cost (6*7) 112500 90000 240000 442500
6 Per Unit Variable Selling Cost 25 20 40
7 Budget Sales Quantity 4500 4500 6000 15000
8 Contribution (1-3-5) 24300 135000 180000 339300
9 Per Unit Contribution (8/7) 5.4 30 30
10 Sales Mix 5 6 6 17
11 Contribution under sales mix (9*10) 27 180 180 387
12 Sales (11*17000/10) 387000
13 Fixed Cost
14 -Manufacturing Overheads 189500
15 -Selling Overheads 80000

16 Total Fixed Cost 269500
17 Profit (12-16) 117500
On perusal of the above table, one can understand that the sales mix has been chosen at 5:6:6
for shoes A, B and C respectively as the contribution is maximum under grade B and C.
Thus, more quantity of grade b and c shall be prepared compared to grade a. However, there
is a cap of 6000 units of each grade and overall manufacturing of 17000 Units. Thus, grade b
and c has been given preference. According, the sales stand at 5000, 6000 and 6000 for
grades A, B and C respectively.
Further, the maximum profit that can be attained under the current situation stands as AUD
117,500.(Ingram Digital Media, inc , 2018)
References:
Accounting For Management, 2018, Margin of safety, [Online]
Available at: https://www.accountingformanagement.org/margin-of-safety/
[Accessed 15 September 2018].
Anon., 2018, Margin of Safety, [Online]
Available at: https://www.myaccountingcourse.com/financial-ratios/margin-of-safety
[Accessed 15 September 2018].
Anon., n.d, Contribution Margin, [Online]
Available at: http://financeformulas.net/Contribution-Margin.html
[Accessed 15 September 2018].
Ingram Digital Media, inc , 2018, Product Mix and Constrained Resources, [Online]
Available at: https://accountinginfocus.com/managerial-accounting-2/short-term-decision-making/
product-mix-and-constrained-resources/
[Accessed 15 September 2018].
Simister, P., 2013, What Is The Margin Of Safety In Break Even Analysis And Why Is It Important?.
[Online]
Available at: http://businessdevelopmentadvice.com/blog/what-is-the-margin-of-safety-in-break-even-
analysis-and-why-is-it-important/
[Accessed 15 September 2018].
WebFinance Inc, 2018, breakeven formula, [Online]
Available at: http://www.businessdictionary.com/definition/breakeven-formula.html
[Accessed 15 September 2018].