Financial Analysis for Managers (ECM05EKM)

This report provides an understanding of financial analysis and investment appraisal techniques. It includes evaluation of financial performance, trend analysis, capital budgeting, and cost-volume-profit analysis. The subject is Financial Analysis for Managers (ECM05EKM) and the course is offered by an unspecified college/university.

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Financial Analysis for Managers (ECM05EKM)

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Contents
Introduction......................................................................................................................................3
Part 1: Evaluation of financial performance of a company listed in the Muscat Securities (MSM)
through using the trend analysis......................................................................................................4
Introduction..................................................................................................................................4
Task A: Comparative Income Statement and balance sheet for last 3 years through using
Horizontal and Vertical Analysis techniques...............................................................................4
A.1: Income Statement-Profitability Position..............................................................................4
A.1.1: Vertical Analysis of Income Statement............................................................................4
A.1.2: Horizontal Analysis of Income Statement........................................................................5
A.2: Balance sheet – financial position........................................................................................7
A.2.1: Vertical Analysis of Balance Sheet...................................................................................7
A.2.2: Horizontal Analysis of Balance Sheet..............................................................................9
Task B: Analysis and Literature Review...................................................................................12
B.1: Literature Review about Vertical and Horizontal Analysis...............................................12
B.2: Profitability Position..........................................................................................................12
B.3: Financial Position...............................................................................................................12
Summary....................................................................................................................................13
Part 2: Capital Budgeting...............................................................................................................14
Task A: Application of Internal Rate of Return in the given Scenario......................................14
Task B: Recommendations through using literature review......................................................15
B.1: Literature review of Internal Rate of Return......................................................................15
B.2: Recommendations based on calculations, LR and Non- financial factors.........................16
Task C: Analysis with literature review.....................................................................................16
C.1: Analysis based on Literature Review and other non-financial factors provided in the
scenario......................................................................................................................................16
C.2: Analysis based on literature review of other relevant non-financial factors......................17
Part 3: Cost-volume-profit analysis..............................................................................................18
Task A: Calculations..................................................................................................................18
Task B: Most Profitable Scenario..............................................................................................19
Task C: Evaluate the role of CVP analysis in taking business decisions..................................19

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References......................................................................................................................................20

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Introduction
The present report has been developed for providing an understanding of the various
financial analytical and investment appraisal techniques that are used for developing an
understanding of the present as well as future growth prospects of a company. In this context, the
report has primarily carried out evaluation of the financial performance of a company listed in
the Muscat Securities Exchange (MSM). This is done by presenting a comparison of the income
statements and the balance sheet for 3 years with the use of horizontal and vertical analysis. This
is followed by analyzing the profitability and financial position of the selected company and
providing recommendations to improve its financial position. This is followed by presenting an
evaluation of the investment technique of Internal Rate of Return (IRR) for evaluating the
feasibility of projects planned to be undertaken by City Cinemas. Lastly, it has conducted a cost-
volume-profit analysis for presenting its usefulness in taking business decisions.

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Part 1: Evaluation of financial performance of a company listed in the Muscat Securities
(MSM) through using the trend analysis
Introduction
This part of the report has presented a financial analysis of the selected company known
as Gulf Stone Company SAOG. This has been carried out by developing and presenting a
comparison of the income and balance sheet for the company over a period of 3 years with the
use of horizontal and vertical analysis technique. This is followed by conducting an examination
of the profitability and financial position of the selected company and providing it
recommendations on the basis of overall findings generated from the literature review.
The case company selected is Gulf Stone Company SAOG, that is involved in
manufacturing and selling of quartz based engineered stone products. The main products
developed by the company include quartz slabs, tiles, mirror, glass effects, color chips and
metallic effects. The products manufactured by the company are used in developing floors,
interior of walls, tables, swimming pools, corporate offices and other types of construction (Gulf
Stone company, 2018).
Task A: Comparative Income Statement and balance sheet for last 3 years through using
Horizontal and Vertical Analysis techniques
A.1: Income Statement-Profitability Position
A.1.1: Vertical Analysis of Income Statement
Golf Stone Company SAOG
Comparative Income Statement
For years Ended 31 st December 2018
Income Statement for three years
Particulars 2016 2017 2018
RO RO RO
Net Revenue 3320618.00 3295489.00 4986748.00
Cost of sales (2915590.00) (2628439.00) (3832091.00)
Gross Profit 405028.00 667050.00 1154657.00
Operating Expenses/Income
Allowance / reversal on impairment
of financial assets - net (38262.00)
General and administrative expenses (331408.00) (332200.00) (345035.00)
Selling and marketing expense (323040.00) (309194.00) (352040.00)
Other income 3406.00 26697.00 21450.00
Profit from operations (284276.00) 52353.00 479032.00

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Less: Financing Cost (40544.00) (28680.00) (56727.00)
Profit for the period before taxation (324820.00) 23673.00 422305.00
Less: Income tax (Expense) Income 153528.00 (44426.00) (47754.00)
Net profit / (loss) for the period (171292.00) (20753.00) 374551.00
Earnings per share (RO) (0.00470) (0.00060) 0.0100
Golf Stone Company SAOG
Comparative Income Statement
For years Ended 31 st December 2018
Vertical Analysis
Particulars 2016 2017 2018
RO RO RO
Net Revenue 100.00% 100.00% 100.00%
Cost of sales -87.80% -79.76% -76.85%
Gross Profit 12.20% 20.24% 23.15%
Operating Expenses/Income
Allowance / reversal on impairment
of financial assets - net -1.15% 0.00% 0.00%
General and administrative expenses -9.98% -10.08% -6.92%
Selling and marketing expense -9.73% -9.38% -7.06%
Other income 0.10% 0.81% 0.43%
Profit from operations -8.56% 1.59% 9.61%
Less: Financing Cost -1.22% -0.87% -1.14%
Profit for the period before taxation -9.78% 0.72% 8.47%
Less: Income tax (Expense) Income 4.62% -1.35% -0.96%
Net profit / (loss) for the period -5.16% -0.63% 7.51%
Earnings per share (RO)
-
0.00000014%
-
0.00000002% 0.00000020%
A.1.2: Horizontal Analysis of Income Statement
Golf Stone Company SAOG
Comparative Income Statement
For years Ended 31 st December 2017
Horizontal Analysis
Increase or Decrease

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Particulars 2017 2016 Amount Percent
RO RO
Net Revenue 3295489.00 4986748.00 (1691259.00
) -33.92%
Cost of sales
(2628439.00
)
(3832091.00
) 1203652.00 -31.41%
Gross Profit 667050.00 1154657.00 (487607.00) -42.23%
Operating Expenses/Income
Allowance / reversal on
impairment of financial assets - net
General and administrative
expenses (332200.00) (345035.00) 12835.00 -3.72%
Selling and marketing expense (309194.00) (352040.00) 42846.00 -12.17%
Other income 26697.00 21450.00 5247.00 24.46%
Profit from operations 52353.00 479032.00 (426679.00) -89.07%
Less: Financing Cost (28680.00) (56727.00) 28047.00 -49.44%
Profit for the period before
taxation 23673.00 422305.00 (398632.00) -94.39%
Less: Income tax (Expense)
Income (44426.00) (47754.00) 3328.00
Net profit / (loss) for the period
(20753.00) 374551.00 (395304.00)
-
105.54
%
Earnings per share (RO)
(0.00060) 0.0100 (0.01060)
-
106.00
%
Golf Stone Company SAOG
Comparative Income Statement
For years Ended 31 st December 2018
Horizontal Analysis
Increase or Decrease
Particulars 2018 2017 Amount Percent
RO RO
Net Revenue 3320618.00 3295489.00 25129.00 0.76%
Cost of sales
(2915590.00
)
(2628439.00
)
(287151.00
) 10.92%
Gross Profit 405028.00 667050.00 (262022.00
) -39.28%

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Operating Expenses/Income
Allowance / reversal on
impairment of financial assets - net
(38262.00) 3687.00 (41949.00)
-
1137.75
%
General and administrative
expenses (331408.00) (332200.00) 792.00 -0.24%
Selling and marketing expense (323040.00) (312881.00) (10159.00) 3.25%
Other income 3406.00 26697.00 (23291.00) -87.24%
Profit from operations (284276.00) 52353.00 (336629.00
)
-
643.00%
Less: Financing Cost (40544.00) (28680.00) (11864.00) 41.37%
Profit for the period before
taxation
(324820.00) 23673.00 (348493.00
)
-
1472.11
%
Less: Income tax (Expense)
Income 153528.00 (44426.00) 197954.00
Net profit / (loss) for the period (171292.00) (20753.00) (150539.00
) 725.38%
Earnings per share (RO) (0.00470) (0.0006) (0.00410) 683.33%
A.2: Balance sheet – financial position
A.2.1: Vertical Analysis of Balance Sheet
Golf Stone Company SAOG
Comparative Balance Sheet
As at 31 st December
Balance Sheet for last three years
Particulars 2016 2017 2018
RO RO RO
ASSETS
Non-current assets
Property, plant and equipment 6242984.00 6319429.00 6704623.00
Less: Accumulated Depreciation 3431325.00 3794439.00 4150947.00
Net Fixed Assets 2811659.00 2524990.00 2553676.00
Bank balances and cash
Inventories 1666638.00 1944171.00 1985290.00
Trade and other receivables 1579328.00 1100418.00 1202524.00
Bank balances and cash 231300.00 176759.00 257834.00

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Total current assets 3477266.00 3221348.00 3445648.00
Total assets 6288925.00 5746338.00 5999324.00
EQUITY AND LIABILITIES
Shareholders’ equity
Share capital 3630000.00 3630000.00 3630000.00
Statutory reserve 437665.00 437665.00 437665.00
Retained earnings / (accumulated
losses) 495174.00 111421.00 (84933.00)
Net shareholders’ equity 4562839.00 4179086.00 3982732.00
Non-current liabilities
Term Loan – Bank Muscat 0.00 0.00 158846.00
Provision for end of service
indemnity 136749.00 145117.00 142047.00
Deferred tax & Income Tax
liabilities 162412.00 174966.00 116667.00
Total non-current liabilities 299161.00 320083.00 417560.00
Current liabilities
Trade and other payables 746218.00 558702.00 519156.00
Provision for income tax 70299.00 31998.00 0.00
Term loans 93737.00 0.00 0.00
Working Capital facilities 516671.00 656469.00 1079876.00
Total current liabilities 1426925.00 1247169.00 1599032.00
Total shareholders’ equity and
liabilities 6288925.00 5746338.00 5999324.00
Net assets per share (RO) 0.12600 0.11500 0.11000
Golf Stone Company SAOG
Comparative Balance Sheet
As at 31 st December
Vertical Analysis
Particulars 2016 2017 2018
RO RO RO
ASSETS
Non-current assets
Property, plant and equipment 99.27% 109.97% 111.76%
Less: Accumulated Depreciation 54.56% 66.03% 69.19%
Net Fixed Assets 44.71% 43.94% 42.57%

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Bank balances and cash
Inventories 26.50% 33.83% 33.09%
Trade and other receivables 25.11% 19.15% 20.04%
Bank balances and cash 3.68% 3.08% 4.30%
Total current assets 55.29% 56.06% 57.43%
Total assets
100.00
% 100.00% 100.00%
EQUITY AND LIABILITIES
Shareholders’ equity
Share capital 57.72% 63.17% 60.51%
Statutory reserve 6.96% 7.62% 7.30%
Retained earnings / (accumulated losses) 7.87% 1.94% -1.42%
Net shareholders’ equity 72.55% 72.73% 66.39%
Non-current liabilities
Term Loan – Bank Muscat 0.00% 0.00% 2.65%
Provision for end of service indemnity 2.17% 2.53% 2.37%
Deferred tax & Income Tax liabilities 2.58% 3.04% 1.94%
Total non-current liabilities 4.76% 5.57% 6.96%
Current liabilities
Trade and other payables 11.87% 9.72% 8.65%
Provision for income tax 1.12% 0.56% 0.00%
Term loans 1.49% 0.00% 0.00%
Working Capital facilities 8.22% 11.42% 18.00%
Total current liabilities 22.69% 21.70% 26.65%
Total shareholders’ equity and liabilities
100.00
% 100.00% 100.00%
Net assets per share (RO) 0.12600 0.11500 0.11000
A.2.2: Horizontal Analysis of Balance Sheet
Golf Stone Company SAOG
Comparative Balance Sheet
As at 31 st December
Horizontal Analysis
Increase or Decrease
Particulars 2018 2017 Amount Percent
RO RO

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ASSETS
Non-current assets
Property, plant and equipment
6704623.0
0 6319429.00 385194.00 6.10%
Less: Accumulated
Depreciation
4150947.0
0 3794439.00 356508.00 9.40%
Net Fixed Assets
2553676.0
0 2524990.00 28686.00 1.14%
Bank balances and cash
Inventories
1985290.0
0 1944171.00 41119.00 2.11%
Trade and other receivables
1202524.0
0 1100418.00 102106.00 9.28%
Bank balances and cash 257834.00 176759.00 81075.00 45.87%
Total current assets
3445648.0
0 3221348.00 224300.00 6.96%
Total assets
5999324.0
0 5746338.00 252986.00 4.40%
EQUITY AND LIABILITIES
Shareholders’ equity
Share capital
3630000.0
0 3630000.00 0.00 0.00%
Statutory reserve 437665.00 437665.00 0.00 0.00%
Retained earnings /
(accumulated losses) (84933.00) 111421.00 (196354.00) -176.23%
Net shareholders’ equity
3982732.0
0 4179086.00 (196354.00) -4.70%
Non-current liabilities
Term Loan – Bank Muscat 158846.00 0.00 158846.00
Provision for end of service
indemnity 142047.00 145117.00 (3070.00) -2.12%
Deferred tax & Income Tax
liabilities 116667.00 174966.00 (58299.00) -33.32%
Total non-current liabilities 417560.00 320083.00 97477.00 30.45%
Current liabilities
Trade and other payables 519156.00 558702.00 (39546.00) -7.08%
Provision for income tax 0.00 31998.00 (31998.00) -100.00%
Term loans 0.00 0.00 0.00
Working Capital facilities
1079876.0
0 656469.00 423407.00 64.50%

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Total current liabilities
1599032.0
0 1247169.00 351863.00 28.21%
Total shareholders’ equity and
liabilities
5999324.0
0 5746338.00 252986.00 4.40%
Net assets per share (RO) 0.11000 0.11500 (0.01) -4.35%
Golf Stone Company SAOG
Comparative Balance Sheet
As at 31 st December
Horizontal Analysis
Increase or Decrease
Particulars 2017 2016 Amount Percent
RO RO
ASSETS
Non-current assets
Property, plant and equipment 6319429.00 6242984.00 76445.00 1.22%
Less: Accumulated Depreciation 3794439.00 3431325.00 363114.00 10.58%
Net Fixed Assets 2524990.00 2811659.00 (286669.00) -10.20%
Bank balances and cash
Inventories 1944171.00 1666638.00 277533.00 16.65%
Trade and other receivables 1100418.00 1579328.00 (478910.00) -30.32%
Bank balances and cash 176759.00 231300.00 (54541.00) -23.58%
Total current assets 3221348.00 3477266.00 (255918.00) -7.36%
Total assets 5746338.00 6288925.00 (542587.00) -8.63%
EQUITY AND LIABILITIES
Shareholders’ equity
Share capital 3630000.00 3630000.00 0.00 0.00%
Statutory reserve 437665.00 437665.00 0.00 0.00%
Retained earnings / (accumulated
losses) 111421.00 495174.00 (383753.00) -77.50%
Net shareholders’ equity 4179086.00 4562839.00 (383753.00) -8.41%
Non-current liabilities
Term Loan – Bank Muscat 0.00 0.00 0.00
Provision for end of service
indemnity 145117.00 136749.00 8368.00 6.12%
Deferred tax & Income Tax
liabilities 174966.00 162412.00 12554.00 7.73%

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Total non-current liabilities 320083.00 299161.00 20922.00 6.99%
Current liabilities
Trade and other payables 558702.00 746218.00 (187516.00) -25.13%
Provision for income tax 31998.00 70299.00 (38301.00) -54.48%
Term loans 0.00 93737.00 (93737.00)
Working Capital facilities 656469.00 516671.00 139798.00 27.06%
Total current liabilities 1247169.00 1426925.00 (179756.00) -12.60%
Total shareholders’ equity and
liabilities 5746338.00 6288925.00 (542587.00) -8.63%
Net assets per share (RO) 0.11500 0.12600 (0.01) -8.73%
(Gulf Stone company, 2018)
Task B: Analysis and Literature Review
B.1: Literature Review about Vertical and Horizontal Analysis
Moles and Kidwekk (2011) stated that the horizontal analysis is carried out for presenting
a comparison of the financial information of a company over a selected financial period. The
analysis provides help to a potential user to gain an insight into the relative changes that are
occurring over time within its financial items. This is carried out by selecting a base year and the
amount of each financial item is converted to a percentage base year amount. Thus, it proves to
be an effective technique for assessing the relative changes in different financial items over time.
The analysis can be carried out for estimating the changes that occur within the financial items
such as revenue, cost of sales, expenses, assets, cash, equity and liabilities over an accounting
period. On the other hand, Schlichting (2013) has stated that vertical analysis involves
converting the amounts for a given financial year as a percentage of a key financial component.
For example, in income statement each item is calculated as a percentage of total revenue. This
type of analysis is also known as common-size analysis that examines the relative changes that
has occurred within a given accounting period by evaluating the composition of each of the
financial statements.
B.2: Profitability Position
It can be stated on the basis of vertical analysis carried out it can be said that the cost of
sales of the company is decreasing over the financial period 2016-2018 with consequent increase
in the gross profitability position. The profit from operations has also depicted an increase over
the selected financial period. The company has reported an increase in the net profitability with a
large improvement in its earnings per share. Thus, it can be said that on the basis of vertical
analysis which has presented the profitability position of the company as a percentage of revenue
that it has depicted a large improvement in its profitability with a consequent decrease in the cost
of sales and operating expenses (Bragg, 2010).

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B.3: Financial Position
The vertical analysis of the balance sheet of the company over the financial period 2016-
2018 has depicted that there is a reduction in the fixed assets of the company over the financial
period 2016-2018. However, the percentage of current assets of the company has improved over
the selected financial period as compared with that of total assets which means that it has good
liquidity base supporting its future growth prospects and reducing the risk of not able to meet its
financial obligations. The proportion of equity as compared to total asset has declined and non-
current liabilities and current liabilities has enhanced that can negatively impact the future
growth performance of the company (Reilly and Brown., 2011). This is because the liquidity
position of the company is declining and the liability position is increasing which means that it is
incorporating more use of leverage in the capital structure that can present future financial risk of
not able to effectively meet its interest obligations (Brigham and Michael, 2013).
Summary
It can be stated from overall analysis of profitability and financial position of the
company evaluated with the use of horizontal and vertical analysis that it has reported an
increase in the net profit and liquidity position. However, the increase in financial leverage
depicted by increase in non-current and current liabilities in comparison to total assets presents a
risk for its future financial growth prospects.

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Part 2: Capital Budgeting
Task A: Application of Internal Rate of Return in the given Scenario
In this section, application of internal rate of return will be performed to examine the two
options to open the new cinema for City Cinema. City Cinema is looking for two options, one is
New Cinema at Sohar and another is to Take-Over existing cinema at Nizwa. Through using the
capital budgeting technique-IRR both of these options in details and recommendations will be
provided in Task B of this part of the assignment.
Formula:
Where:
 Ct = Net Cash inflow during the whole period t
 C0 = Investment cost
 r = discount rate
 t = total number of time periods
Information Provided in the scenario
Details New cinema at Sohar Take-over existing cinema
at Nizwa
Amount in RO Amount in RO
Initial Cost 500000.00 500000.00
Cash Flows
Year 1 150000.00 200000.00
Year 2 160000.00 185000.00
Year 3 190000.00 160000.00
Year 4 175000.00 175000.00
Year 5 200000.00 150000.00
Internal rate of Return of Option 1: New cinema at Sohar
Yea
r Cash Flows PVF @
15% PV @ 15% PVF @
25% PV @ 25%
0 -500000.00 1.000 -500000.00 1.000 -500000.00
1 150000.00 0.870 130434.78 0.800 120000.00
2 160000.00 0.756 120982.99 0.640 102400.00
3 190000.00 0.658 124928.08 0.512 97280.00

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4 175000.00 0.572 100056.82 0.410 71680.00
5 200000.00 0.497 99435.35 0.328 65536.00
75838.02 -43104.00
Internal Rate of return 21.38%
Internal rate of Return of Option 2: Take-over existing cinema at Nizwa
Yea
r Cash Flows PVF @
15% PV @ 15% PVF @
25% PV @ 25%
0 -500000.00 1.000 -500000.00 1.000 -500000.00
1 200000.00 0.870 173913.04 0.800 160000.00
2 185000.00 0.756 139886.58 0.640 118400.00
3 160000.00 0.658 105202.60 0.512 81920.00
4 175000.00 0.572 100056.82 0.410 71680.00
5 150000.00 0.497 74576.51 0.328 49152.00
93635.55 -18848.00
Internal Rate of return 23.32%
Internal rate of Return of Option 1: New cinema at Sohar 21.38%
Internal rate of Return of Option 2: Take-over existing cinema at Nizwa 23.32%
Task B: Recommendations through using literature review
B.1: Literature review of Internal Rate of Return
Krantz (2016) stated that internal rate of return (IRR) is a technique used in capital
budgeting for estimating the profitability position of potential investments. It is the interest rate
at which the net present value of all the cash flows, that is, both positive and negative, associated
with a project or investment becomes zero. The technique is extensively used by the business
managers and investors for evaluating the feasibility of a project for investment purpose. The
project is accepted on the basis of the criteria if the internal rate of return exceeds the required
rate of return for a project and vice-versa.
According to Feldman and Libman (2011), this type of capital budgeting technique is
finding extensive use by the project managers for ranking the capital investment projects on the
basis of their estimated rate of return. The project having higher IRR are considered as better
capital investments in comparison to other projects. The higher is the IRR realized for a project
the greater is the rate of cash inflow for a company realized from a project or investment. The
internal rate of return is expressed as percentage so that it is relatively easy for the project
managers to rank the project on the basis that generates higher return on investment. The positive
IRR means that the project will be able to provide some value to the stakeholders while negative
IRR indicates that it is incurring higher cost in comparison to the returns realized. However,

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there are also some drawbacks associated with the IRR that it is not feasible for ranking the
projects of different sizes. It does not take into account the cost of capital and therefore not
helpful for comparing the projects with different sizes (Zimmerman and Yahya-Zadeh, 2011).
B.2: Recommendations based on calculations, LR and Non- financial factors
It can be recommended on the basis of literature review section carried above that project
with higher IRR is considered worthwhile for the potential investment. This is higher project
having higher IRR will provide higher returns as compared with the cost of project and therefore
have higher chances of future growth prospects. The non-financial factors that are presented
within the scenario, such as, consumer trends, population growth, competition and initial cost
need to be considered before investing in a project. In addition to this, the other non-financial
factors such as flexibility, adaptability, and nature of operations, availability of physical and
human capital resources, technical superiority and ease of maintenance should be taken into
account at the time of selecting a capital project. On the basis of literature review analysis and
non-financial factors discussed within the scenario, City Cinema should consider the second
project option of taking over existed cinema at Nizwa. This is because it is having higher IRR
and also on the basis of non-relevant factors of consumer trends, population growth, competition
and initial cost. The consumer trend have reached stagnation and competition is moderate as
such both these factors favor second project while initial cost for both are same. The other non-
relevant financial factors such as adaptability, technical superiority, ease of maintenance and
threats also favors investment in second project (Davies and Crawford, 2011).
Task C: Analysis with literature review
C.1: Analysis based on Literature Review and other non-financial factors provided in the
scenario
It can be stated on the basis of the literature review carried out in the respect of analyzing
the capital budgeting technique of IRR that the project having higher IRR need to be selected by
the project manager for realizing higher returns in the future context. The non-financial factor
that is consumer trend that takes into account the relevant factors of preferences of consumers
towards the new product or service being delivered by the project. The next non-financial factor
is of population growth that considers the rate of increase within the population section of a
country over a specific time-period that has a huge impact on the sales revenue associated with a
project. This is followed by examination of competition as stated in the given project scenario
which examines the intensity of competition in the market that can have an influence on the
growth rate of the project. The cost incurred on developing a project should also be considered
while deciding the type of project in which capital investment should be done (Damodaran,
2011).
C.2: Analysis based on literature review of other relevant non-financial factors
The other relevant non-financial factors such as adaptability, technical superiority, ease
of maintenance and threats should also be considered for investing within a project. Adaptability

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refers to the extent of ease of a project adapting to external environment changes while technical
superiority refers to the presence of technical competencies for carrying out a specific project as
compared to others within a give organization. The ease of maintenance refers to the degree of
managing projects with convenience while threats refer to the presence of risk factors such as
health, safety and other operational factors that could negatively impact the profitability of a
project (Baker and Powell, 2009).

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Part 3: Cost-volume-profit analysis
Task A: Calculations
Formula to calculate the contribution per unit: Revenue per unit –Variable expenses per unit
Particulars Product A Product B
Price per unit
(RO)
Price per unit
(RO)
Sales price 20 15
Material 10 9
Direct wages 3 2
Variable expenses 3 2
Fixed expenses 800 800
Contribution per unit
Particulars Product A Product B
Price per unit
(RO)
Price per unit
(RO)
Revenue per unit 20 15
Variable expenses per
unit 16 13
Contribution per unit 4 2
Total Contribution and profit under each scenario
Particulars Product A Product B Total
Scenario 1 100 200
Total Contribution 400 400 800
Less: Fixed Cost 800
Profit (Scenario 1) 0
Scenario 2 150 150
Total Contribution 600 300 900
Less: Fixed Cost 800
Profit (Scenario 2) 100
Scenario 3 200 100
Total Contribution 800 200 1000
Less: Fixed Cost 800
Profit (Scenario 3) 200

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Task B: Most Profitable Scenario
It can be stated on the basis of overall analysis that scenario C is highly profitable among all
three on the basis of cots-volume-profit analysis. This is because the contribution margin for
third scenario is highest as compared with others. It is because of adequate choice of products.
Thus, it is recommended that company should manufacture product A as compared with product
B. This is because the scenario involves larger amount of product A as compared with product B.
Task C: Evaluate the role of CVP analysis in taking business decisions
Cost-volume-profit-analysis (CVP) is used for developing insight into the profitability of
the products or services of a company. The businesses are largely adopting the use of CVP
analysis for making informed decisions about the products or service that are sold. It can largely
be stated as an analytical technique that is largely used for determining the relation between
volume, cost, process and profits. The use of CVP analysis can be carried out for developing the
overall profit plans for an entity to support its future growth and development plans. The sue of
this technique can be done effectively for determination of the maximum sales volume for
avoiding losses and determining the amount of sales that should be realized for achieving the
profitability goals of a firm. The management can effectively use the approach to develop a right
combination of costs and volume at which a firm can achieve the stated goals and objectives of
its long-term growth and development. The major decisions that the management of a firm take
on the basis of CVP analysis is examining the impact of changes in price, costs and volume on
profitability, minimum sales required for realizing break even and void losses and estimating the
most profitable product for a company (Arnold, 2013).

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