A Case Study of Cvp Analysis Essay

In arrange to compete with other shiver lodge ins on the same beach of the repair, the minuscular shake in my track is pr drinking glassd at $5.00, a medium shake appeals $7.00, and a large shake is priced at $10.00. My shack offers classic flavors of chocolate, strawberry and vanilla, but also caters to eclectic tastes with raspberry, mocha, Oreo shakes and many other different flavors. I use chocolate, strawberry and other flavored syrup to provide the flavor chosen by customers. The data for take outshake costs is base on the study of existing restaurants, industry reports and research on expected nominal costs to be incurred in operating the business. The cost of materials motiveed to make milkshakes is shown in tabular array 1. tabularise 1 variable and Fixed costs to make milkshakesSmall (8oz.size)Medium (10oz.size)Large (12oz.size)Variable costsWhole milk ($15 for a 5 gallon=740oz.)2oz.2.5oz.3oz.Cream ($20 for 1 gallon = 128oz.)2oz.2.5oz.3oz.Sugar ($10 for a 15 lb.b ag=30cups)1/4cups 1/2cups3/4cupsFlavored syrup ($13.5 for a 96oz. bottle )0.5oz.1oz.1.5oz. Vanilla ice cream ($24 for 600oz.)6oz.8oz.10oz.Whipped cream ($2.50 for 6.5oz. can)0.15oz.0.2oz.0.25oz.Straws 5 Color Flex Straws0.05/ frame6 Color Flex Straws0.06/piece8 Color Flex Straws0.08/pieceCups 8oz. cups0.4/piece10oz. cups0.5/piece12oz.cups0.6/pieceFixed costsShack rental $500/mo contrast insurance $600/yr employment license $25/moMilkshake blenders $700 for 10 blenders Refrigerator/freezer $500Shack ribbon (tables, counters, chairs, umbrella) $2400 Cleaning and equipment maintenance fee $150/mo Advertising (sign, banner, flyers) $ 125/moThe total ameliorate costs shown in table 1 be $5075, which is the amount the possessor is going to apply for a small business loan. This business loan assumes (i) a constant interest rate of 6% passim the amortization period (2 historic period) and (ii) that interest payments ordain be made periodic for both payment types (Principal addition Interest or Blended). For a $5075 loan amount, the monthly payment depart be $224.93. The amortization table is shown in table 2 if the loan start date is Mar 2013Table 2 amortization Table contributeMonthYearPaymentInterestBalanceMonthYearPaymentInterestBalance Apr2013199.5525.384875.45Apr2014211.8613.072401.51May2013200.5524.384674.90May2014212.9212.012188.59Jun2013201.5623.374473.34Jun2014213.9910.941974.60Jul2013202.5622.374270.78Jul2014215.069.871759.54Aug2013203.5821.354067.20Aug2014216.138.801543.41Sep2013204.5920.343862.61Sep2014217.217.721326.20Oct2013205.6219.313656.99Oct2014218.36.631107.90Nov2013206.6518.283450.34Nov2014219.395.54888.51Dec2013207.6817.253242.66Dec2014220.494.44668.02Jan2014208.7216.213033.94Jan2015221.593.34446.43Feb2014209.7615.172824.18Feb2015222.72.23223.73Mar2014210.8114.122613.37Mar2015223.731.120.00Besides the variable and fixed costs, and the loan payment mentioned above, I also expect two part-time employees willing be hired for my shack. Ea ch of them will receive $10/hr and work 20 hours per week. The total labor costs will be $1600 which include taxes and benefits. The other cost for the business will be the 10% gross sales that will be given to resort where shack located.2. Analysis assumptionsIn order to finish the Cost-Volume-Profit analysis, several assumptions need to be made 1)The sales prices for milkshakes in my shack ar constant and competitive among other vendors. The costs of materials argon assumed to be the minimum costs to be incurred in operating this business. 2)The disparagement periods for shack decoration (tables, chairs, counters, and umbrellas) be 3 years, and the depreciation periods for equipments (blenders, refrigerator and freezer) will be 5 years. 3)The business loan is a 2 years amortization loan the monthly payment includes both principal and interest. 4)The mix of milkshakes sold will be 30% small size, 40% medium size, and 30% large size.3. Cost-Volume-Profit analysis1) Break-Even Ana lysisThe break- nevertheless position is the direct of sales at which the companys profit is zero. The formula for the unit sales to attain break- dismantle orient is Unit sales to break even= Fixed expenses/Unit CMBased on the cultivation of relative costs provided in part 1, we can derive the monthly fixed costs in table 3, and unit variable costs in table 4.Table 3 Fixed monthly expensesExpenses Amount NotesShack rental$500Business insurance $50$600/12=$50Business license$25Equipment depreciation(blenders, refrigerator and freezer)$20$1200/60=$20Shack decoration depreciation(tables, chairs, counters, and umbrellas)$67$2400/36=$67Cleaning and maintenance fee$150Advertising (banner, sign, flyers)$125Loan payment$224.93Table 2Part time employees salary$1600 union$2761.93Table 4 Unit Variable CostsExpenses Unit priceSmall MediumLargeWhole milk$0.02/oz$0.04$0.05$0.06Cream $0.16/oz$0.32$0.40$0.48Sugar $0.33/cup$0.08$0.17$0.25Flavored syrup$0.14/oz$0.07$0.14$0.21Vanilla ice cream$0. 04/oz$0.24$0.32$0.40Whipped cream$0.38/oz$0.06$0.08$0.10Straws $0.05$0.06$0.08Cups$0.40$0.50$0.60Total $1.26$1.72$2.18Knowing the monthly fixed costs and unit variable costs, we are able to calculate the Unit CM.Small (30%)Medium (40%)Large (30%)Sales price (a)$5*0.9=$4.5$7*0.9=$6.3$10*0.9=$9 Variable expenses per unit (b)$1.26$1.72$2.18 Unit CM (a-b)*percentage0.9721.8312.046The weighted Unit CM for milkshakes will be 4.85 (0.972+1.831+2.046). Using the formula for the unit sales to attain break-even point, my shack will need 570 cups of milkshakes to break-even ($2761.93/4.85). Among all of the sales, 171 cups are small size, 228 cups are medium size, and 171 cups are large. If I give myself a $3000 paycheck every month, it will increase the monthly fixed income to 5761.93 dollars. Hence, I will need to mete out 1188 (5761.93/4.85)cups of milkshakes to break-even. Among all of the sales, 356 cups are small size, 476 cups are medium size, and 356 cups are large.2) The Break-Even C hartThe relationships among revenue, cost, profit and volume are illustrated on a cost-volume-profit graph. A CVP graph highlights CVP relationships over wide ranges of activity. If 570 cups of milkshakes are sold, the total sales after subtracting the 10% for resort will be $3744.90 (171*5*0.9+228*7*0.9+171*10*0.9). Total variable costs will be $980.40 (1.26*171+1.72*228+2.18*171). Total fixed costs will be 2761.93, hence the profit is round up to be 0. If 1188 cups of milkshakes are sold, the totalsales after subtracting the 10% for resort will be $7804.80 (356*5*0.9+476*7*0.9+356*10*0.9). Total variable costs will be $2043.36 (1.26*356+1.72*476+2.18*356). Total fixed costs will be 5761.93, hence the profit is also rounded up to be 0. From the sales and costs data above, the break-even graph with and without owners salary is given in chart 1.Chart 1 The break even chartFrom chart 1, we can see that the total sales revenue and total expense lines in both graphs are with same slopes no matter owners salary is included or not. The only difference in two graphs is the fixed expense line shifts up by $3000 when the owner salary is included. It also makes the intercept of total sales revenue and total expense line in the second graph shifts up by $3000. The slopes keep the same. 4. ConclusionFrom the CVP analysis above, I need to sell 570 cups of milkshakes in order to break-even. If I quit the stemma and pay myself $3000 per month to run the shack, 1188 cups of milkshakes need to be sold just to break-even. There are several factors that will affect my decision about quitting my job to open the shack. One of the greatest aspects of working for someone else is security. Running a shack might get down me more than income during the tourist season, but I also need to take the risk that I will lose money when it is out of season. Working for my own business also means I need to give up some other benefits like a pension or company provided insurance. These are all the opportunity cost for leaving my job. By being a business owner, I would tolerate to earn equal amount to make sure that money that has been lost is recovered in approximately similar time frame. In order to do so, I will choose keep my up-to-date job and work part-time in the shack. Firstly, it will al trends make sure I ache enough money to pay back the loan for the shack and keep business smooth even in the off season. Secondly, I can still guarantee the retirement plan for the long time, which is more financially smart. Last but not the least, by working part time in the shack, I dont need to build in the whole pay check into fixed cost. Hence, the break-even point will be easier to reach. At the same time, as another part-time employee, I can facilitate cut some labor cost or generate more sales revenue, in which way makes more profit for my business.