MOD003460 - Analyzing Business Performance Using Costing Data

This report provides a comprehensive analysis of business performance using marginal costing techniques. It begins by establishing a base case scenario with defined selling prices, variable costs, and fixed costs to evaluate the impact of changes in these underlying variables on profit. The report then presents marginal costing statements under various scenarios, including increases and decreases in selling price and variable costs. Key performance indicators such as the profit-volume (PV) ratio, break-even point (BEP) in both sales and units, and margin of safety are calculated and analyzed for each scenario. The report also includes a sensitivity analysis to determine the impact of changes in selling price and variable costs on profitability, as well as an assessment of operational leverage. Scenario testing is used to demonstrate how different conditions can affect the net profit of the company. The analysis reveals that even slight changes in underlying variables can significantly influence the organization's profitability, highlighting the importance of careful management and strategic decision-making.

Running head: MANAGING BUSINESS PERFORMANCE
Managing Business Performance
Name of the Student:
Name of the University:
Authors Note:

1MANAGING BUSINESS PERFORMANCE
Contents
Introduction:....................................................................................................................................2
Requirement 1:.................................................................................................................................3
Requirement 2:.................................................................................................................................3
Requirement 3:.................................................................................................................................6
Requirement 4:...............................................................................................................................13
Sensitivity analysis:...................................................................................................................14
Operational leverage:.................................................................................................................15
Scenario testing:.........................................................................................................................16
Conclusion:....................................................................................................................................19
References:....................................................................................................................................21

2MANAGING BUSINESS PERFORMANCE
Introduction:
It is important to provide the appropriate assumptions at the beginning to ensure that the
students are aware of these to properly appraise the marginal costing statements under different
underlying variable. In order to evaluate the impact of changes in underlying variables on profit
and other important parameters of an organization the base case is assumed below.
Base case scenario (Normal circumstances)
Particulars Amount (₤)
Selling price per unit of finished goods 10
Variable cost per unit of finished goods 2.5
Fixed costs 660,000
Normal sales units 120,000
Net profit 240,000
Assuming that the above is the base scenario all the calculations and scenario analysis shall be
made to evaluate the impact of changes in underlying variables on the amount of profit and other
important elements of marginal costing statement of the above organization.

3MANAGING BUSINESS PERFORMANCE
Requirement 1:
Using the base case scenario as provided in the table above the marginal costing statement of the
organization in per unit and total year format is prepared and presented below.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 7.50 900,000.00
Less: Fixed costs 5.50 660,000.00
Per unit fixed costs: (660000 / 120000)
Net profit 2.00 240,000.00
Requirement 2:
Preparation and presentation of marginal costing statements under different scenario are
provided below.
Part a:
When the selling price will increase by 15% from the base selling price of ₤10.00 per unit the
marginal costing statement per unit and total year would look like this.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 11.50) 11.50 1,380,000.00

4MANAGING BUSINESS PERFORMANCE
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 9.00 1,080,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 3.50 420,000.00
Note: It has been assumed that only the sales price have increased and other underlying
variables have remained same, i.e. the variable cost per unit has remained at ₤2.50 per unit and
fixed costs have remained constant at ₤660,000. It has been assumed that except the particular
change no other changes have taken place in the underlying variables (Sofat and Hiro, 2015).
Part b:
Marginal costing statement of the organization if the original selling price reduces by 15% will
be as following.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 8.50) 8.50 1,020,000.00
Less: Variable costs (120000 x 2.5) 2.50 300,000.00
Contributions 6.00 720,000.00
Less: Fixed costs 5.50 660,000.00

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Per unit: (660000 / 120000)
Net profit 0.50 60,000.00
Note: Again it is expected that the variable cost per unit and total fixed costs would remain
unaffected due to the reduction in selling price per unit (Renz, 2016).
Part c:
The marginal costing statement of the organization if the variable costs reduces to 20% of the
original selling price is presented below.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 2) 2.00 240,000.00
Contributions 8.00 960,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 2.50 300,000.00
Note: No changes in other underlying assumptions except reduction in variable costs to 20% of
original selling price (Karadag, 2015).

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Part d:
The marginal costing statement of the organization will be as following if the variable costs of
each unit increases to 30% of original selling price.
Particulars Per unit (₤) Total year (₤)
Sales (120000 x 10) 10.00 1,200,000.00
Less: Variable costs (120000 x 3) 3.00 360,000.00
Contributions 7.00 840,000.00
Less: Fixed costs 5.50 660,000.00
Per unit: (660000 / 120000)
Net profit 1.50 180,000.00
Note: Except the increase in variable costs to 30% of selling price it has been assumed that no
other changes have occurred in fixed and other costs of the organization (Bryce, 2017).
Requirement 3:
Part a:
Base case scenario (Normal circumstances)
PV ratio 75

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(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000
PV ratio 75
BEP sales 880000
BEP in units (Fixed costs / Contribution per unit)
BEP units 88000
Contribution per unit 7.5
Fixed costs 660000
Increase in original selling price by 15%
PV ratio 78.26
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 78.26

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BEP sales 843,341.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 73,334.00
Contribution per unit 9.00
Fixed costs 660,000.00
Decrease in original selling price by 15%
PV ratio 70.59
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 70.59
BEP sales 935,000.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 110,000.00
Contribution per unit 6.0

9MANAGING BUSINESS PERFORMANCE
0
Fixed costs 660,000.00
Decrease in variable costs to 20% of selling price
PV ratio 80.00
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 80.00
BEP sales 825,000.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 82,500.00
Contribution per unit 10.00
Fixed costs 660,000.00
Increase in variable costs to 30% of selling price

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PV ratio 70.00
(Contribution per unit x 100/ Selling price per unit)
BEP in sales (Fixed costs /PV ratio)
Fixed costs 660,000.00
PV ratio 70.00
BEP sales 942,860.00
BEP in units (Fixed costs / Contribution per unit)
BEP units 94,286.00
Contribution per unit 7.00
Fixed costs 660,000.00
Part b:
Margin of safety:
Base case scenario (Normal circumstances)
Margin of safety (sales - Break even sales) 320,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 26.67 (Nosheen, Sadiq

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and Rafay, 2016)
Increase in original selling price by 15%
Margin of safety (sales - Break even sales) 536,659.
00
Margin of safety in % (sales - Break even sales) x100/ Sales 38.
89
Decrease in original selling price by 15%
Margin of safety (sales - Break even sales) 85,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 8.33
Decrease in variable costs to 20% of selling price
Margin of safety (sales - Break even sales) 375,000.00
Margin of safety in % (sales - Break even sales) x100/ Sales 31.25
Increase in variable costs to 30% of selling price