MBA 6100 Spring 2019 Block 1: CVP Analysis Case Study

This case study report analyzes the cost-volume-profit (CVP) of NTM Corporation to determine strategies for increasing profitability. The analysis includes the preparation of a contribution format income statement for 2017, calculating break-even sales in units and dollars. The report then evaluates proposals from the Production Manager, Quality Control Manager, and Sales Manager, each suggesting changes to reduce costs or increase sales volume. The Production Manager's proposal involves reducing material costs and lowering sales price. The Quality Control Manager's proposal focuses on improving sales volume, and the Sales Manager's proposal focuses on increasing sales volume. The report calculates the financial impact, break-even points, and net profit for each proposal. The analysis concludes that the Quality Control Manager's proposal is the most beneficial, recommending its implementation to the CFO, Myrna Snowflake, based on its positive impact on profitability and break-even units. The report also provides detailed income statements and calculations for each scenario, including references to relevant financial management texts.

Running Head: Accounting case study
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Project Report: Accounting case study

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CVP Analysis
To: Myrna Snowflake (CFO)
From: Andrew (CVP analyst)
Date: 1st Feb 2019
Sir,
On the basis of our discussion on the cost volume profit analysis, a study has been performed
on your previous year financial activities as well as the various suggestions from the
production manager, quality control manager and sales managers have been studied to
recognize that how the break even sales (units) of the company could be lower as well as net
profit level could be improved.
The current year data depicts that the net profit of the company was $ 6,996,000 and the
break even units and break even amount of the company was 3,16,302 units and $
11,386,861. The sales of the company were bit higher than the BEP sales of the company.
Further, the suggestion of product manager has taken into concern and it has been found that
the few changes in the quality will improve the sales level as well as will reduce the material
expenses of the business. It explains that the profit of the company would be $ 7, 557,600 and
the break even units and break even amount of the company would be 329114 units and $
11,354,430 which is better than the previous year performance however, and it will affect the
quality of the products (Rose & Hudgins, 2012).
Moreover, the quality manager and sales manager’s suggestions have been studied and it has
been found that the profit of the company would be $ 28,59,360 and $ 4498800 respectively.
Further, the break even units and break even amount of the company would be 452104
units and 420041 units, and $ 16,501,791 and $ 14,365,393.
On the basis of the study over all the projects, it has been evaluated that the quality manager’s
proposal is best. As the suggestion does not hamper quality of the product as well as it would
offer the highest net profit to the business. Along with that, the break even unit of the

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company is also less (Chandra, 2011). To recommend, being a CFO, you should go for
quality control manager’s proposal.
Below are the details of all 4 proposals:
Previous year proposal:
NTM Corporation
Income Statement
For the year ended December 31, 2017
(Amt in $)
P.U. Total
Sales Units 600000
Sales 36 21600000
Less: variable cost of goods sold
Direct labour 0.9 540000
Direct material 5.4 3240000
Variable manufacturing overhead 3.24 1944000
5724000
Gross contribution margin 15876000
Less: variable marketing and administration
expenses
variable selling expenses 1.8 1080000
Contribution margin 14796000
Less: fixed expenses (both manufacturing and
non manufacturing)
Fixed manufacturing Overhead 4200000
Fixed selling expenses 1200000
Fixed operating expenses 2400000
7800000
Net profit 6996000
Cost-Volume-Profit Relationships - Breakeven
Per Unit Amounts
Selling price $ 36.00
Variable costs 11.34
Contribution margin $ 24.66
Total fixed costs $ 7,800,000
Breakeven in units (contribution margin / total
fixed cost) 316,302

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Breakeven in dollars (break even in units *
selling price) $ 11,386,861
Production manager proposal:
NTM Corporation
Income Statement
For the year ended December 31, 2017
(Amt in $)
P.U. Total
648000
Sales 34.5 22356000
Less: variable cost of goods sold
Direct labour 0.9 583200
Direct material 4.86 3149280
Variable manufacturing overhead 3.24 2099520
5832000
Gross contribution margin 16524000
Less: variable marketing and administration expenses
variable selling expenses 1.8 1166400
Contribution margin 15357600
Less: fixed expenses (both manufacturing and non
manufacturing)
Fixed manufacturing Overhead 4200000
Fixed selling expenses 1200000
Fixed operating expenses 2400000
7800000
Net profit
$
7,557,600
Cost-Volume-Profit Relationships - Breakeven
Per Unit
Amounts
Selling price
$
34.50
Variable costs 10.80
Contribution margin
$
23.70
Total fixed costs
$
7,800,000
Breakeven in units (contribution margin / total fixed cost) 329,114
Breakeven in dollars (break even in units * selling price) $

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11,354,430
Quality control manager proposal:
NTM Corporation
Income Statement
For the year ended December 31, 2017
(Amt in $)
P.U. Total
Sales units 606000
Sales 36.5 22119000
Less: variable cost of goods sold
Direct labour 7.3 4423800
Direct material 5.4 3272400
Variable manufacturing overhead 3.24 1963440
9659640
Gross contribution margin 12459360
Less: variable marketing and administration expenses
variable selling expenses 1.98019802 1200000
Contribution margin 11259360
Less: fixed expenses (both manufacturing and non
manufacturing)
Fixed manufacturing Overhead 4200000
Fixed selling expenses 1200000
Fixed operating expenses 2400000
Fixed equipment 600000
8400000
Net profit
$
2,859,360
Cost-Volume-Profit Relationships - Breakeven
Per Unit
Amounts
Selling price
$
36.50
Variable costs 17.92
Contribution margin
$
18.58
Total fixed costs
$
8,400,000
Breakeven in units (contribution margin / total fixed cost) 452,104

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Breakeven in dollars (break even in units * selling price)
$
16,501,791
Sales manager proposal:
NTM Corporation
Income Statement
For the year ended December 31, 2017
(Amt in $)
P.U. Total
Sales units 660000
Sales 34.2 22572000
Less: variable cost of goods sold
Direct labour 5.13 3385800
Direct material 5.4 3564000
Variable manufacturing overhead 3.24 2138400
Less: Expenses -45000
9043200
Gross contribution margin 13528800
Less: variable marketing and administration expenses
variable selling expenses 1.75 1155000
Contribution margin 12373800
Less: fixed expenses (both manufacturing and non
manufacturing)
Fixed manufacturing Overhead 4200000
Fixed selling expenses 1200000
Fixed operating expenses 2400000
Fixed sales salaries 75000
7875000
Net profit
$
4,498,800
Cost-Volume-Profit Relationships - Breakeven
Per Unit
Amounts
Selling price
$
34.20
Variable costs 15.45
Contribution margin
$
18.75
Total fixed costs $

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7,875,000
Breakeven in units (contribution margin / total fixed cost) 420,041
Breakeven in dollars (break even in units * selling price)
$
14,365,393

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References:
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill
Education.