Report On Cost-Volume-Profit Analysis (A Study On A Pottery Seller)

Submitted To
Md. Habibur Rahman
Course Instructor Managerial Accounting (ACC605)

Submitted By
Md. Mahfuzur Rahman Md. Mahedi Hasan Nure Mahmud Monika 112082044 112111055 112111076

Program: MBA, Sec: A

Submission Date
September 9, 2011

United International University

Introduction

Potter is a traditional occupational group engaged in clay modeling and making various household items and toys from clay. Potter is a caste name, which indicates that pottery as a profession was almost exclusively in the hands of Hindus in the past. Clay made toys and clay fruits like palm, banana, jackfruit or mango, are popular sales items in traditional fairs and festivals. In past every house hold used pottery items for their daily use but now silver and plastic products grab the pottery market. Now pottery products take a different shape. Clay made pottery products are used as show piece. The market is changing now. Potters are making different attractive product for household uses also for the upper class people for looking good their house. All class people are egger to buy this product. So the market is expanding as well as the opportunity also. The pottery goods made of clay, which were on the verge of collapse in Bangladesh about few decades back, are returning in almost every home in the form of decorative show pieces and one can easily find at least some such designer pieces in every house. Shoppers said good news is that traditional potters are now applying more creative thinking techniques to the development of goods. They are also testing different options like making jewelry and crockery items on experimental basis In Dhaka City, there are almost 700 pottery shops. The sellers of pottery items import their product from different part of the country like Savar, Dhamrai, Barishal, Poutakhali, Etc. Only one transportation system is applied to bring clay made pottery item, which is Boat. Because others transportation system can broke the products. The seller make order their required items to the manufacturer, then the manufacturer made the requirements and send through boat. After reaching the boat in Buriganga River, the seller need some labor to bring their product to the shop. Pottery selling is now taking a different shape because the producers (potters) showing their creativity and producing different type of product that is now used by upper class people as show piece. The rapid used of the products bringing new opportunity for this business. Clay pottery appears to be making a comeback in popularity with new designs and techniques.

Objectives

The main objective of the study is following bellow:  Understand the assumptions of cost-volume-profit (CVP) analysis.  Explain the features of CVP analysis.  Determine the breakeven point and output level needed to achieve a target operating income.  Explain CVP analysis in decision making and how sensitivity analysis helps managers cope with uncertainty.  Use CVP analysis to plan variable and fixed costs.  Apply CVP analysis to a company producing different products.  Adapt CVP analysis to situations in which a product has more than one cost driver.  Distinguish contribution margin from gross margin.

Sources
From the following business we collected cost data and try to do his CVP analysis. Business: Product: Address: Pottery Seller Pottery Item Road#5 Dhanmondi, Dhaka (Beside Mirpur Road)

Cost-Volume-Profit
CVP (Cost-Volume-Profit) Analysis is usually used to understand the relationship between cost, volume and profit; it is a vital tool in many business decisions. CVP analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. Managers often perform CVP analysis to plan future levels of operating activity and provide information about by focusing on interactions between the following 5 elements:  Prices of products  Volume of level of activity  Per unit variable costs  Total fixed cost  Units of product sold Here, we have to calculate the following element for a pottery seller for analyzing his CostVolume-Profit. The elements are following:  Calculating the Variable Cost per unit, VC/unit  Calculating the Variable Cost in total, VC  Calculating the Fixed Cost per unit, FC/unit  Calculating the Fixed Cost in Total, FC  Calculating the Break-even Point of sales, BEP  Preparing the CVP graph indicating BEP CVP Analysis can be used in marketing to determine the point of maximum profit for a company, in relation to the cost of those efforts and the volume of sales created. It is a key measurement in determining marketing strategy and developing realistic business goals.

List of Product and Cost

Product Name

Price Range (tk.) 50-200 50-300 20-80 10-50

Average Costs(tk.) 125 175 50 30 52

1. Flower Tub 2. Mask 3. Jar 4. Shanki (Plate) 5. Bank: a. 1kg b. 0.5 kg c. 0.25 kg 6. Lamp pot 7. Show piece 8. Ghonta 9. Pithar Saj 10. Putul 11. Ornaments 12. Vase 13. Jug 14. Mug 15. Sculpture
Total:

80 50 25 100-200 10-200 10-90 10-50 10-100 50-200 50-200 10-50 10-50 100-400 150 105 50 27.5 55 125 125 30 30 250 1380

Average cost per unit = 1380/ 15 = 92Taka

Assumption:
 Assume that a sales per month is 1800 unit.

List of Variable and Fixed Cost

There are some fixed and variable expenses occur in a Pottery Business, which are as follows:

Fixed Cost (Per Month)

Rent for Space Salary for 1 employee Electricity Bill Tool Repairing tools Total Fixed Expense:

Taka 30,000 4,000 1,000 250 2,500 37,750

Variable Cost
Pottery Expense Transportation Cost Cost for Broken Item Other Expense 1800 X 92 1800 X 4 19.56 X 92 1800 X 2 Total Variable Expense:

Taka 1,65,600 7,200 1,800 3,600 1,78,200

Description
Cost Per Unit Selling Price Per Unit Sales in Unit Total Sales Total Variable Expense Per Unit variable Cost Total Fixed Expense

Calculation

Taka
92 tk. 128 tk. 1800 unit

1800 X 128

2,30,400 tk. 1,78,200 tk.

178200 1800

99 tk. 37,750 tk.

CVP Analysis
Profit Calculation:
Total Sales Profit = Fixed Expense + Variable Expense + Profit = Total Sales Fixed Expense Variable Expense = 2, 30,400 - 37,750 1, 78,200 = 14,450tk So, Pottery Sellers Profit is Tk. 14,450 because he sales 1800 units of pottery item.

Break Even Calculation:

Total Sales Or, 128Q Or, Q = Fixed Expense + Variable Expense + Profit = 37,750 + 99Q + 0 = 1302 Units here,
Q= Quantity of Pottery Sold

Total Sales in Taka

= 128Q = 128 x 1302 = 1, 66,656tk.

For Break Even Point the Pottery Seller should sell 1302 units of pottery item, and the Break Even Sales will be 1, 66,656tk. That time his variable expense will be {99 x 1302 = 1, 28,898 tk.} and fixed cost remain unchanged.

Target Profit Calculation:

Total Sales Or, 128Q Or, Q = Fixed Expense + Variable Expense + Profit = 37,750 + 99Q + 25000 = 2164 Units here,
Q= Quantity of Pottery Sold

Total Sales in Taka

= 128Q = 128 x 2164 = 2, 14, 236tk.

If the Pottery Seller wants to increase his profit at 25,000tk then he has to sell 2164 units of Pottery Item and then the sales amount will be 2,14,236tk. That time his variable expense will be {99 x 2164 = 2, 14,236 tk.} and fixed cost remain unchanged.

Now we are showing the CVP in Graph:

P
TR

Tk.2, 76,992 TC Target Profit 25000tk Present Profit 14450tk

Tk. 2,30,400
BEP VC

Tk. 1,66,656

FC

0
1302 unit 1800 unit 2164 unit

CVP Graph of Pottery Seller

From the Graph we can see that, the pottery sellers Break Even Sales is 1302 units and the Revenue is Tk.1, 66,656. That means if he sales 1302 units he could not get any profit. But his present sales is 1800units and the total Revenue is Tk.2,30,400 and he get profit at Tk.14,450. Now, if he wants to increase his profit at Tk25, 000 then he has to sell 2164 units of pottery item and his total sales amount will be Tk.2, 76,992.

Findings
Pottery business is now growing up in a different way. Every business has some cost and every businessman expects a certain amount profit. Though pottery a sole proprietor business but it has some cost and its owners must expect a profit. And he always tries to maximize his profit. From the CVP analysis a businessman can determine that how much he has to sell for achieving the maximum profit. From the Graph and the total calculation we can see that, the pottery sellers Break Even Sales is 1302 units and the Revenue is Tk.1, 66,656. That means if he sales 1302 units he could not get any profit. That time his variable cost is 1, 28,898 tk. and fixed cost is 37,750tk. But his present sales is 1800units and the total Revenue is Tk.2,30,400 and he get profit at Tk.14,450 and that time his variable cost is 1, 78,200tk. and fixed cost is 37,750tk. Now, if he wants to increase his profit at Tk25, 000 then he has to sell 2164 units of pottery item and his total sales amount will be Tk.2, 76,992. And now his variable cost will be 2, 14,236 tk. and fixed cost will remain unchanged.

Conclusion
In past every house hold used clay made pottery product in their home. But now the creativity of potters gives this business a new hope. Now from lower class to upper class people start using clay made pottery product. In this CVP analysis we analyze the relationship among the cost, volume and profit. This analysis gives a clear knowledge about, how profit is affected by: selling price, sales volume, unit variable cost, and total fixed costs.