Financial Management Assignment: Cost-Volume-Profit Analysis

This document presents a comprehensive solution to a financial management homework assignment. It addresses key concepts such as cost-volume-profit (CVP) analysis, including how an increase in sales price impacts the breakeven point and the technique's usefulness for short-term decision-making, along with its limitations. The assignment also explores non-quantitative factors in project evaluation and delves into investment appraisal techniques, specifically Net Present Value (NPV), Internal Rate of Return (IRR), and payback period, discussing their advantages and disadvantages. The solution is supported by references to relevant academic sources.

Financial Management

Answer 3d)
Keeping the other factors constant, the increase in the sales price would lead to the decrease
in the number of the breakeven units (Rὂhrich, 2014). The reason for the same is that the
increase in the sale price of the goods would lead to the increase in the contribution margin
per unit. With the higher amount of the contribution margin per unit in the denominator, the
breakeven number of units would lower. Thus, this means the entity would reach the
breakeven point sooner or at lesser units with the increase in the selling price.
Total Word Count: 96
Answer 3e)
The technique of the cost profit volume analysis is useful for short-term decision making.
This is because there is variation in the short-term period, depending on the current
production capacity of a company and the time required for changing the capacity. However,
in the long run period, it is likely that all the cost behaviour patterns would change (Bierman
and Smidt, 2012). Some of the issues that may arise in the cost volume profit analysis are
elaborated as follows.
 CVP analysis aids the managers in making the projections for the future depending
upon the variable costs. The issues can arise in the companies who do not maintain précised
and detail-oriented records. This means, that the projections that are based on the cost
estimates and not on the actual data can lead to the inaccurate results.
 The Cost Profit Volume analysis can be challenging in the entities with the multi-
product operation, where there are present many variable cost ratios. Thus, when the said
analysis would be required to be performed for each single product category, it would not
only be tedious but also a complex task for the managers.
 The CVP analysis is based on a range of assumptions. One of the assumptions is that
the fixed cost is likely to remain constant irrespective of the changes in the level of output.
This is however not possible in the real life scenario.
 The yet another issues that can arise in the CVP analysis is in the division of the total
costs into the fixed and variable components. The said exercise would be specially difficult in
the case of the entities having multiple product ranges.
Total Word Count: 270

Answer 1b)
Some of the non quantitative factors to be considered for the project evaluation are the
stakeholders’ aspirations, technology implications, effect on the existing contracts with the
suppliers and other partners, levels of up gradation in the entity, employees training and
feedback and others.
Answer 1c)
The technique used in part a), was the Net Present Value technique. The advantages of this
investment appraisal technique are that it considers the time value of money which is a very
important concept in real life (Scott, 2012). The next key advantage is the consideration of
both before and after project cash flows. Thirdly risks associated, along with the effect of the
inflation are also taken into account for the evaluation. There are some disadvantages in the
technique such as the complexity in the performance and can only be understood and
performed by an expert. An appropriate discount rate cannot be easily determined and is
based on numerous estimates, the failure of which can lead to unrealistic and inefficient
results.
The IRR method is also similar to the NPV method. It represents the interest earned on initial
investment at different points of time. The key advantage is the result in the absoluter terms
and the consideration of the time value of money (Brigham and Houston, 2012). The
disadvantages are the possibility of the multiple IRRs. There is an assumption that the
reinvesment is made on same ratem, which is unrealistic.
Pay back period is the technique which describes the time required to recover the initual
expenditure incurred. The prime advantage of this technique is it is simple to perfom and can
be easily understood and perform. The chief disadvantage is that it fails to considers the time
value of money.
Total Word Count: 241

References
Rὂhrich, M. (2014) Fundamentals of Investment Appraisal: An Illustration based on a Case
Study. Boston: Walter de Gruyter GmbH & Co.
Scott, P. (2012) Accounting for Business: An Integrated Print and Online Solution. Oxford:
Oxford University Press, p. 342.
Bierman Jr, H., and Smidt, S. (2012) The capital budgeting decision: economic analysis of
investment projects. 9th ed. Oxon: Routledge.
Brigham, E. F., and Houston, J. F. (2012) Fundamentals of Financial Management. Boston
MA: Cengage Learning.