Managing Business Performance

This article discusses managing business performance and its impact on profit and other important parameters of an organization. It includes a sensitivity analysis, operational leverage calculation, and scenario testing. The article highlights that even slight changes in underlying variables such as selling price and variable costs can significantly influence the amount of profit of the organization.

Running head: MANAGING BUSINESS PERFORMANCE
Managing Business Performance
Name of the Student:
Name of the University:
Authors Note:

1MANAGING BUSINESS PERFORMANCE
Contents
Introduction:....................................................................................................................................2
Requirement 1:.................................................................................................................................3
Requirement 2:.................................................................................................................................3
Requirement 3:.................................................................................................................................6
Requirement 4:...............................................................................................................................13
Sensitivity analysis:...................................................................................................................14
Operational leverage:.................................................................................................................15
Scenario testing:.........................................................................................................................16
Conclusion:....................................................................................................................................19
References:....................................................................................................................................21

2MANAGING BUSINESS PERFORMANCE
Introduction:
It is important to provide the appropriate assumptions at the beginning to ensure that the
students are aware of these to properly appraise the marginal costing statements under different
underlying variable. In order to evaluate the impact of changes in underlying variables on profit
and other important parameters of an organization the base case is assumed below.
Base case scenario (Normal circumstances)
Particulars Amount (₤)
Selling price per unit of finished goods 10
Variable cost per unit of finished goods 2.5
Fixed costs 660,000
Normal sales units 120,000
Net profit 240,000
Assuming that the above is the base scenario all the calculations and scenario analysis shall be
made to evaluate the impact of changes in underlying variables on the amount of profit and other
important elements of marginal costing statement of the above organization.

3MANAGING BUSINESS PERFORMANCE
Requirement 1:
Using the base case scenario as provided in the table above the marginal costing statement of the
organization in per unit and total year format is prepared and presented below.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 7.50 900,000.00
Less: Fixed costs 5.50 660,000.00
Per unit fixed costs: (660000 / 120000)
Net profit 2.00 240,000.00
Requirement 2:
Preparation and presentation of marginal costing statements under different scenario are
provided below.
Part a:
When the selling price will increase by 15% from the base selling price of ₤10.00 per unit the
marginal costing statement per unit and total year would look like this.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 11.50) 11.50 1,380,000.00

4MANAGING BUSINESS PERFORMANCE
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 9.00 1,080,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 3.50 420,000.00
Note: It has been assumed that only the sales price have increased and other underlying
variables have remained same, i.e. the variable cost per unit has remained at ₤2.50 per unit and
fixed costs have remained constant at ₤660,000. It has been assumed that except the particular
change no other changes have taken place in the underlying variables (Sofat and Hiro, 2015).
Part b:
Marginal costing statement of the organization if the original selling price reduces by 15% will
be as following.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 8.50) 8.50 1,020,000.00
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 6.00 720,000.00
Less: Fixed costs 5.50 660,000.00

5MANAGING BUSINESS PERFORMANCE
Per unit: (660000 / 120000)
Net profit 0.50 60,000.00
Note: Again it is expected that the variable cost per unit and total fixed costs would remain
unaffected due to the reduction in selling price per unit (Renz, 2016).
Part c:
The marginal costing statement of the organization if the variable costs reduces to 20% of the
original selling price is presented below.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 2) 2.00 240,000.00
Contributions 8.00 960,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 2.50 300,000.00
Note: No changes in other underlying assumptions except reduction in variable costs to 20% of
original selling price (Karadag, 2015).

6MANAGING BUSINESS PERFORMANCE
Part d:
The marginal costing statement of the organization will be as following if the variable costs of
each unit increases to 30% of original selling price.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 3) 3.00 360,000.00
Contributions 7.00 840,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 1.50 180,000.00
Note: Except the increase in variable costs to 30% of selling price it has been assumed that no
other changes have occurred in fixed and other costs of the organization (Bryce, 2017).
Requirement 3:
Part a:
Base case scenario (Normal circumstances)
PV ratio 75

7MANAGING BUSINESS PERFORMANCE
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000
PV ratio 75
BEP sales 880000
BEP in units (Fixed costs / Contribution per unit)
BEP units 88000
Contribution per unit 7.5
Fixed costs 660000
Increase in original selling price by 15%
PV ratio 78.26
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 78.26

8MANAGING BUSINESS PERFORMANCE
BEP sales 843,341.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 73,334.00
Contribution per unit 9.00
Fixed costs 660,000.00
Decrease in original selling price by 15%
PV ratio 70.59
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 70.59
BEP sales 935,000.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 110,000.00
Contribution per unit 6.0

9MANAGING BUSINESS PERFORMANCE
0
Fixed costs 660,000.00
Decrease in variable costs to 20% of selling price
PV ratio 80.00
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 80.00
BEP sales 825,000.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 82,500.00
Contribution per unit 10.00
Fixed costs 660,000.00
Increase in variable costs to 30% of selling price

10MANAGING BUSINESS PERFORMANCE
PV ratio 70.00
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 70.00
BEP sales 942,860.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 94,286.00
Contribution per unit 7.00
Fixed costs 660,000.00
Part b:
Margin of safety:
Base case scenario (Normal circumstances)
Margin of safety (sales - Break even sales) 320,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 26.67 (Nosheen, Sadiq

11MANAGING BUSINESS PERFORMANCE
and Rafay, 2016)
Increase in original selling price by 15%
Margin of safety (sales - Break even sales) 536,659.
00
Margin of safety in % (sales - Break even sales) x100/ Sales 38.
89
Decrease in original selling price by 15%
Margin of safety (sales - Break even sales) 85,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 8.33
Decrease in variable costs to 20% of selling price
Margin of safety (sales - Break even sales) 375,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 31.25
Increase in variable costs to 30% of selling price

12MANAGING BUSINESS PERFORMANCE
Margin of safety (sales - Break even sales) 257,140.00
Margin of safety in % (sales - Break even sales) x100/ Sales 21.43
Part c:
In order to calculate the percentage of net profits under different scenarios the following formula
has been used:
Net profit x 100/ Sales
Net profit as percentage
Option
Base case 20.00
Increase in original selling price by 15% 30.43
Decrease in original selling price by 15% 5.88
Decrease in variable costs to 20% of original selling price 25.00
Increase in variable cost to 30% of original selling price 15.00
Requirement 4:
It is clear from the above calculations that even slightest of changes in the underlying variables
such as selling price and variable costs would significantly influence the amount of profit of the

13MANAGING BUSINESS PERFORMANCE
organization (Lehmann, 2016). With the original selling price of ₤10 per unit and variable costs
of ₤2.50 per unit the organization is expected to earn net profit of ₤240,000. The sensitivity
analysis is conducted by the management to determine the implication of changes in underlying
variables on the profitability of an organization.
Sensitivity analysis:
It is clear from the information processed in the above document that the financial
performance of the company is affected significantly due to changes in underlying conditions
(Kumar, 2017). Thus, the financial performance of the company is quite sensitive to the
underlying variables.
The increase in selling price by 15% would result in increase in net profit to ₤420,000. Thus, a
15% increase in selling price would help the company to increase its net profit by as much as
75%. Thus, net profit of the company is very sensitive to the selling price of each unit of
production (Rothaermel, 2015).
Similarly decrease in selling price by 15% to ₤8.50 per unit would reduce the net profit of the
company from ₤240,000 to ₤60,000. Hence, the net profit of the company would reduce by 75%
subsequent to reduction of selling price by 15% from the original selling price of ₤10.00 per unit
(Lasserre, 2017).
As per the base case the variable costs is ₤2.50 per unit, i.e. 25% of original selling price.
However, slight decrease in variable costs to 20% of original selling price would increase the net
profit of the company to ₤300,000 (Rothaermel, 2015). This is an increase of ₤60,000 in net
profit which is an increase of 25% from original net profit as per the base case. Again the net
profit of the company is very sensitive to the changes in variable costs. Similarly the increase in

14MANAGING BUSINESS PERFORMANCE
variable cost by 5% from 25% of original selling price to 30% of original selling price would
result in decrease in net profit by 25% (Ho et. al. 2016).
It is clear from the above discussion that the net profit of the company is very sensitive to the
underlying variables. Thus even a slightest change in the underlying variables would trigger a
significant change in the net profit of the company. Hence, the management must take steps
carefully to ensure that the company is in a position to increase its net profit in the future by
improving its financial performance (Prajogo, 2016).
Operational leverage:
Operational leverage is calculated by dividing the percentage of change in net profit of an
organization with the percentage of change in sales of the organization. It helps to assess the
operating leverage of the organization (Perin et.a l. 2016).
Operating leverage in case the selling price increases by 15% from the original selling price is
calculated below.
Percentage of change in sales due to increase in selling price is calculated below:
(1380000 – 1200000) x 100/ 1200000 = 15% (Prajogo, 2016).
Calculation of percentage of change in net profit of the company due to the increase in selling
price is provided below:
(420000 – 240000) x 100/240000 = 75%.
Thus, operating leverage would be as following:
Change in percentage of net profit / Change in percentage of sales. = 75% /15% = 5. Thus, the
company has a huge operating leverage. This indicates that for each ₤ increase in selling price

15MANAGING BUSINESS PERFORMANCE
the operating profit of the company would increase by ₤5 assuming other conditions remain
unchanged (Iooss and Lemaître, 2015).
Again with the decrease in selling price of the company would similarly affect the net profit of
the company. The following calculation would be helpful to understand the impact on net profit
of the company due to the decrease in the selling price of the company.
In case the selling price decreases by 15% then the operating leverage would be as following:
Percentage of change in sales due to decrease in selling price is calculated below:
(1,020,000 – 1,200,000) x 100/ 1200000 = (15%).
Calculation of percentage of change in net profit of the company due to the increase in selling
price is provided below:
(60000 – 240000) x 100/240000 = (75%).
The operating leverage would be as following:
Change in percentage of net profit / Change in percentage of sales. = (75%) / (15%) = 5. Hence,
this indicates decrease of ₤5 for each ₤ decrease in net selling price of unit sold by the company
if other conditions remain unchanged.
Scenario testing:
As per the discussion above it has already seen how the changes in underlying conditions
of the company changes the profitability of the company. The company’s profitability is very
sensitive to the operating parameters. With minimum changes in the underlying conditions such
increase and decrease of selling prices would influence the profitability of the company
immensely. The company as per its base case scenario, i.e. with original selling price of ₤10 per

16MANAGING BUSINESS PERFORMANCE
unit and variable cost of ₤2.50 per unit with total fixed costs of ₤660,000 is expected to earn a
net profit of ₤240,000. However, increase in net selling price by 15% would increase the net
profit of the company by 75% to ₤420,000 i.e. an increase of ₤180,000. Similarly a decrease in
net selling price by 15% would reduce the net profit of the company by similar margin ₤180,000.
This shows how sensitive the profitability of the company is to the underlying assumptions and
variables.
However, it is important to note that changes in the underlying conditions have been considered
one at a time. But an organization operates in an uncertain environment where the underlying
conditions keep on changing and it is unrealistic to assume that only a single underlying variable
would change at a time. Thus, in scenario testing a brief calculation will help to assess the impact
on net profit of the company in case there is more than one changes in the underlying variables at
a time (Renz, 2016).
Suppose that along with increase in net selling price the expected sales of the company would
reduce in proportion to the increase in net selling price. Then the impact on net profit of the
company is calculated below.
Particulars Per
unit (₤)
Total year
(₤)
Sales (102000 x 11.50) 11
.50
1,173,000.
00
Less: Variable costs (102000 x 2.5) 2
.50
255,000.
00

17MANAGING BUSINESS PERFORMANCE
Contributions 9
.00
918,000.
00
Less: Fixed costs 5
.50
660,000.
00
Per unit: (660000 / 120000)
Net profit 3
.50
258,000.
00
Expected sales at 11.50 per unit (120000
x 85%)
102000
Thus, even if the increase in net selling price results in decrease in proportionate sales units even
then the company would be able to increase higher profit than under base case scenario.
Similarly in case the decrease in net selling prices would increase the sales unit proportionately
then the impact on net profit of the company is calculated below.
Particulars Per
unit (₤)
Total year
(₤)
Sales (138000 x 11.50) 8
.50
1,173,000.
00
Less: Variable costs (138000 x 2.5) 2 345,000.

18MANAGING BUSINESS PERFORMANCE
.50 00
Contributions 6
.00
828,000.
00
Less: Fixed costs 5
.50
660,000.
00
Per unit: (660000 / 120000)
Net profit 0
.50
168,000.
00
Expected sales at 11.50 per unit (120000
x 85%)
138000
As can be seen that the net profit of the company would decrease with the decrease in net selling
price of the company however, the decrease would be significantly less as compared to the
scenario where no increase in selling units is expected from the decrease in net selling price
(Sofat and Hiro, 2015).
Conclusion:
The discussion about the expected financial performances of the company with the different
underlying assumptions shows that the sensitivity analysis on the financial performance of an
organization provides the management with significant amount of information as to the expected

19MANAGING BUSINESS PERFORMANCE
financial performance of the company under different circumstances. Such analysis helps the
management to take important decisions in relation to the management of an organization.

20MANAGING BUSINESS PERFORMANCE
References:
Bryce, H.J., 2017. Financial and strategic management for nonprofit organizations. Walter de
Gruyter GmbH & Co KG.
Ho, K.L.P., Nguyen, C.N., Adhikari, R., Miles, M.P. and Bonney, L., 2017. Leveraging
innovation knowledge management to create positional advantage in agricultural value
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November 2018]
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Springer, Boston, MA.
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40.
Kumar, R., 2017. Strategic Financial Management Casebook. Academic Press.
Lasserre, P., 2017. Global strategic management. Macmillan International Higher Education.
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21MANAGING BUSINESS PERFORMANCE
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Wiley & Sons.
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