ACCT20076: Optimizing Cisco Manufacturing with CVP Analysis

This report presents a cost volume profit (CVP) analysis conducted for Cisco Manufacturing Pty Ltd., a radiator manufacturer with three plants, aiming to minimize costs and maximize profits. The analysis calculates contribution margins, break-even points, and operating incomes for each plant under various production scenarios. The findings indicate that Preston Manufacturing has the highest contribution margin, recommending it operate at maximum capacity, while Brunswick and Northcote operate at minimum. The report includes detailed calculations, findings, recommendations, and action areas, emphasizing the importance of shifting production focus to the most cost-effective plant. Desklib provides access to similar solved assignments and study resources for students.

EXECUTIVE SUMMARY
Cisco Manufacturing Pty Ltd. (Cisco) manufactures radiators for triple B
semi- trailers and has three plants for the same. All plants have separate
costing systems.
The company wishes to minimise its costs in order to maximise its profits.
A cost volume profit analysis was carried out to determine which plant
should produce what quantity in order to maximise profits depending
upon their respective cost structures under various production capacity
levels.
The company can produce and sell 150000 units of the radiators.
From the analysis, we see that Preston Manufacturing plant has the
highest contribution margin per unit and hence it is recommended that
the plant operate at maximum capacity, Brunswick and Northcote both
operate at minimum capacity in order to maximise profits of the
company.

ANALYSIS
The cost volume profit analysis of the three plants was carried out. The analysis
comprised of calculation of the contribution margin per unit, breakeven point,
operating income for equal units of production and profit maximising allocation of
production units
Contribution margin per unit under current production
Northcote Brunswick Preston
Per unit Per unit Per unit
Selling price $700 $700 $700
Variable material
cost $160 $165 $150
Variable labour
cost $160 $150 $145
Variable
overhead cost $20 $30 $35
Contribution
margin $360 $355 $370

CONTINUED…
Contribution Margin per unit under maximum production
Northcote Brunswick Preston
Per unit Per unit Per unit
Selling price $700 $700 $700
Variable material
cost $170 $170 $160
Variable labour
cost $165 $155 $155
Variable overhead
cost $25 $30 $30
Contribution
margin $340 $345 $355

CONTINUED…
Breakeven Point
Break even point under current production
Northcote Brunswick Preston
Contributi
on margin
per unit $360 $355 $370
Fixed
manufact
uring
costs $16,64,000 $18,72,000 $14,56,000
Fixed
marketing
costs $12,48,000 $14,04,000 $10,92,000
Total fixed
costs $29,12,000 $32,76,000 $25,48,000
Breakeve
n point 8,088.9 9,228.2 6,886.5
Break even point under maximum production
Northcote Brunswick Preston
Contributi
on margin
per unit $340 $345 $355
Fixed
manufact
uring
costs $21,06,000 $28,60,000 $18,72,000
Fixed
marketing
costs $16,38,000 $20,02,000 $14,56,000
Total fixed
costs $37,44,000 $48,62,000 $33,28,000
Breakeven
point 11,011.8 14,092.8 9,374.6

CONTINUED..
Operating income of Cisco if 50000 units are produced per year by each
plant.
Northcote Brunswick Preston
Required
Production units 50000 50000 50000
Production units
required per day 192 192 192
Production
capacity required Maximum capacity Normal capacity Normal capacity
Contribution
margin per unit $340 $355 $370
Total Contribution
margin $1,70,00,000 $1,77,50,000 $1,85,00,000
Fixed costs $37,44,000 $32,76,000 $25,48,000
Operating income $1,32,56,000 $1,44,74,000 $1,59,52,000
Total operating income is $4,36,82,000

PROFIT MAXIMISATION
PRODUCTION LEVELS
Northcote Brunswick Preston
Minimum capacity Minimum capacity Maximum capacity
Contribution
margin per unit $360 $360 $355
Per day
production 159 108 310
Total annual
production 41,340 28,080 80,600
Total Contribution
margin $1,48,82,400 $1,01,01,600 $2,86,13,000
Fixed costs $3,90,000 $5,46,000 $33,28,000
Operating income $1,44,92,400 $95,55,600 $2,52,85,000
Total operating profit is $4,93,33,000

FINDINGS
From the above analysis, we see that Preston has the highest
contribution margin per unit under both the current production levels
and maximum production levels. Also the break even point is the lowest
for Preston under both production levels.
Brunswick has a higher contribution margin as compared to Northcote
under maximum production level but it also has a higher breakeven point
indicating a higher fixed cost in the same production level as compared
to Northcote.
If 50000 units were produced by each plant, the highest operating
income is given by Preston, followed by Brunswick and then Northcote.
Under the given situation, Preston and Brunswick will operate at normal
capacity and Northcote at maximum capacity.

RECOMMENDATIONS
From the analysis and findings carried out, it is recommended that Cisco
should let Preston produce the maximum radiators as it has the highest
contribution margin under all the capacity levels. Also the fixed costs are
lower as compared to other plants at all capacity levels.
Preston will produce 80600 units per annum. The remaining 69400 units
will be produced by the other two plants.
Between Northcote and Brunswick, Northcote has a lower cost structure.
Since Northcote has the same contribution margin per unit under
minimum and normal capacity, and fixed costs are higher in normal
capacity, it is recommended the plant should operate at minimum capacity.
The remaining units would be produced by Brunswick under minimum
capacity.

ACTION AREAS
Currently the highest production is from the Brunswick plant which has the lowest
contribution margin and the highest breakeven point.
The company should reduce the production levels of this plant and rather let Preston plant
make the maximum production owing to its lowest fixed costs and higher contribution margin.