Cost Volume Profit (CVP) Analysis Report: Azad Inc. Performance

This report provides a comprehensive cost-volume-profit (CVP) analysis of Azad Inc.'s financial performance. The analysis begins with an executive summary and an introduction outlining the scope of the report. It includes the preparation of a CVP income statement, calculation of variable cost ratios, and contribution margins. The report also covers breakeven analysis, determining the breakeven sales and margin of safety, and assesses the impact of a proposed laser purchase on the company's financial metrics. The report concludes with an overview of the findings, highlighting the positive financial performance and the benefits of the laser purchase, supported by appendices that contain detailed financial data and calculations.

Management accounting

Executive summary
The report has been prepared and in the cost volume and profit analysis is performed.
There is the making of the income statement and with that, the profit has been determined.
The contribution rate is calculated which is at 28%. The breakeven analysis is also performed
and in that the margin of safety is calculated at 42.9% which will be sufficient for the
business to maintain the target profits. The laser is being considered and after taking into
account the changes which will be occurring there will be profit which will be made and the
margin of safety will also be maintained.

Table of Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................4
CVP analysis..............................................................................................................................4
Breakeven analysis.....................................................................................................................4
Purchase of laser........................................................................................................................5
Conclusion..................................................................................................................................5
References..................................................................................................................................6
Appendix....................................................................................................................................7

Introduction
In this report, the CVP analysis of Azad Inc will be carried out. There will be
consideration of the information which is provided and with the help of the same all the
calculations will be made. There will be the preparation of the CVP income statement in
which all of the variable cost and fixed cost will be represented separately. The variable cost
ratio and contribution margin will be calculated with the help of the same. There will also be
a calculation of the breakeven sales and the margin of safety. Company is proposing to buy a
laser machine which will increase its production capacity and there will be saving of the
variable cost. The new margin of safety will also be calculated and that will be used for the
making of the decision.
CVP analysis
The income statement has been made as per the CVP and it has been shown in
appendix 1. There is the consideration of all the variable and fixed cost in the same and with
that, the variable cost ratio and contribution margin have been determined (Ihemeje et al.,
2015). It is found that variable cost amounts to 72% of the sales and after taking that in
consideration the business will be making the contribution of 28%. There is the inclusion of
the fixed cost also and the net profit which will be earned amounts to $1476630. By the help
of this, it can be said that company will be making the profits at this ratio and there will be no
losses which will be incurred (Baral, 2016).
Breakeven analysis
The breakeven analysis is performed and the results of the same are shown in
appendix 2. It can be seen that the breakeven sales for 2016 will be $7131713. By the
identification of the same, it is possible for the company to identify the margin of safety. This
is the value which the company is selling above the breakeven point and on which the profits
are made by the company (Landers et al., 2012). It has been determined that there are 42.9%
of the sales which counts for margin of safety. The sales which will be needed in 2017 have
been determined by considering the increase in the profits with the percent of 20. After
considering this the value of the sales which is determined is equal to $13573725.

Purchase of laser
The company is considering the purchase of a laser which will be making
improvements in the company. All of the calculations which are made in relation to this have
been presented in Appendix 3. With the undertaking of the laser, there is the reduction in the
variable cost which is made and by considering it new variable cost ratio and contribution
margin has been calculated (Mandelli et al., 2014). The contribution margin has been derived
to be 33.9%. The new breakeven sales have been calculated at $6965002. There is the target
profit which the company desires to attain and to maintain that the sales of $12191271 will be
required to be made. By considering all of this there is the new margin of safety which is
ascertained and that is accounted for at 42.9%. This is the level which will be remaining with
the company after the breakeven point (Palia, 2014).
Conclusion
The analysis has been made and in that there is the consideration of the various
aspects. The CVP analysis is performed and all of the results which are attained with the help
of that have been explained in the report. It has been determined that profits are made in the
business. There is the breakeven analysis and with that, the amount of the sales which is
required to be maintained at a minimum has been determined. The laser purchase has also
been considered and it will be beneficial for the company to undertake it as there is an
increase in the profit which will be made possible by that. The overall results which are
identified are positive and the company is operating in an effective manner.

References
Baral, G. (2016). Cost–Value–Profit Analysis and Target Costing with Fuzzy Logic
Theory. Mediterranean Journal of Social Sciences, 7(2), 21.
Ihemeje, J. C., Okereafor, G., & Ogungbangbe, B. M. (2015). Cost-volume-profit analysis
and decision making in the manufacturing industries of Nigeria. Journal of
International Business Research and Marketing, 1(1), 7-15.
Landers, G. W., Thompson, A. L., Kitchen, N. R., & Massey, R. E. (2012). Comparative
breakeven analysis of annual grain and perennial switchgrass cropping systems on
claypan soil landscapes. Agronomy journal, 104(3), 639-648.
Mandelli, D., Ma, Z., & Smith, C. (2014). Comparison of a traditional probabilistic risk
assessment approach with advanced safety analysis. Trans. Am. Nucl. Soc, 111, 459.
Palia, A. P. (2014, January). Target profit pricing with the web-based breakeven analysis
package. In Developments in Business Simulation and Experiential Learning:
Proceedings of the Annual ABSEL conference (Vol. 35).

Appendix
Appendix 1
Azad Inc.
CVP Income Statement
for the Year ending 2016
Amount Percentages
Sales 1,25,00,000
Variable cost:
Direct Material. 42,09,000
Direct Labor 30,00,200
Manufacturing Overhead Variable 12,64,000
Selling Expenses Variable 3,90,000
General Administration Expenses Variable 1,98,700
Total variable cost 90,61,900 72%
contribution 34,38,100 28%
Fixed expenses:
Manufacturing Overhead Fixed 13,25,670
Selling Expenses Fixed 4,23,000
General Administration Expenses Fixed 2,12,800
Total fixed cost 19,61,470
Net profit 14,76,630
Appendix 2
Brerakeven sales for 2016
Contribution margin ratio 28%
Fixed costs 19,61,470
Breakeven =FC/CMR 7131373
Margin of Safety in 2016
Sales in 2016 1,25,00,000

BE point 7131373
Margin Safety 53,68,627
Margin Safety Ratio - MS/Sales 42.9%
Sales required to achieve Target Net Income in 2017
Profit in 2016 14,76,630
Increase of 20% in 2017 1771956
Sales needed = FC+TNI/CMR 13573725
Appendix 3
New Cost Structure %
Sales 1,25,00,000
Variable Costs Reduce 800,000 82,61,900 66%
Contribution Margin 42,38,100 33.9%
Fixed Costs increase 400,000 23,61,470
Profit 18,76,630
Breakeven in sales 2017 - FC/CMR 6965002
Sales needed to meet target Net income
FC+TNI/CMR 12191271
Margin of Safety in 2017
Sales in 2017-Breakeven in 2016 53,68,627
Margin of safety ratio
Margin of safety/sales 42.9%