Managerial Accounting Cost Volume and Profit Analysis

Group Members: M. Shams Ghayas Syed Danyal Mustafa Mustafa Ilyas Talha Farooqui

OVERVIEW OF THE COMPANY

Philip

Morris Pakistan Limited is a public limited company, listed on the Karachi and Lahore Stock Exchanges Formerly it was known as Lakson Tobacco Company, which got incorporated in 1969 as a public limited company It is amongst the two multinational tobacco companies, the other being Pakistan Tobacco Company.

PHILIP MORRIS PAKISTAN Brand Portfolio

For

the domestic market, the company offers ten brands of cigarettes. Of the main ones, it markets and sells both international brands like Marlboro and Red & White, and locally owned brands like Morven Gold, Diplomat, and K2.

Highlights for Year CY12

Unlike its biggest formal sector competitor, Pakistan Tobacco Company, Philip Morris Pakistan has been struggling with profits since CY11. The story for CY12 was the same as the Company could not get out of the red zone. Philip Morris Pakistan competes for market share with Pakistan Tobacco Company, which has a market share of almost 60 percent.

Revenues and Profitability

In 2012, the gross turnover experienced a boost of more than 11 percent year-on-year percent from Rs 31.9 billion in CY11 to almost Rs. 36 billion in CY12. The improvement during the major chunk of the year came from the Company's ongoing trade incentive programs and some volumetric consolidation during the period. The positive effects of the trade initiatives resulted in higher sales of 262 million cigarette sticks, while the gross margins improved considerably due to price increase since June 2012.

Liquidity and Operational Position

The Company has no long-term debt on its book but has a significant portion of current liabilities as short-term borrowings, which suggests that the Company might be facing working capital problems. However, during CY12, the firm invested heavily in the property, plant and equipment. These investments are predominantly as per the Company's plans to modernize manufacturing facilities and equipment and upgrade warehousing for efficiency gains which will continue for the next couple of years.

The brand Malboro

The

amazing Marlboro cigarette brand began in England 1847 and was initially targeted at female smokers. Aiming at this market segment was not successful, so in the 1920's Marlboro was re-targeted to female smokers in the United States. It is really popular in Pakistan, especially among the youth

FIXED COST ANALYSIS

Marlboro has a high fixed cost which include advertising, depreciation, rent, insurance, legal cost (necessary for a tobacco company) etc. Payroll (5000,000) is the pick of all the fixed cost as it is the highest amongst all the fixed costs i.e. it takes up more that 50% of the fixed cost for the company The next comes the taxes (1,040,000) and rent (900,000) which are also very significant amounts compared to all the other fixed costs The high fixed cost lead to a higher operating leverage So a small percentage increase in the sales would lead to a larger percentage increase in net operating income.

VARIABLE COST ANALYSIS

The

variable cost of the company can be classified into three categories which are; costs of goods sold, direct labor and overhead. Contribution margin is 2 rupees per Contribution = Revenue Variable ciggerate Margin/Unit s/Unit Expenses/Unit
2 = 5 3

MARLBORO
Break-Even Point
$60,000,000 Even Break $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 $(10,000,000) $(20,000,000)
Units (X)

Total Cost Total Revenue Profit (Loss)

analysis

BEP

Total Revenue

Total Cost

Profit (Loss)

2,000,000

4,000,000

6,000,000

8,000,000 10,000,000 12,000,000

Analysis of the graph

The fixed costs of the company are 10,000,000. This is the starting point of the Total Cost Curve (Red Line). At this point even if the company is producing 0 units, it will have to bear this cost. This is also shown through the black line which shows the profit/loss of the company. If 0 units are produced, the loss would be 10,000,000 because of the fixed cost. The variable costs of the company are 3 per unit. However the fixed cost per unit would reduce as the number of unit increases. The summation of Fixed Costs and Variable costs is the Total Costs. This is represented by the Red Line.

Analysis (Continued)

As you can see from the graph, the total costs are increasing at a decreasing rate. This is because that the fixed costs are being spread over a vast number of units. The total revenue is represented by the blue line. The selling price of the product is 5. The revenue is derived by multiplying the selling price by the number of units. As you can see, when the number of units sold is 0, the revenue and variable price would be 0, thus giving the company loss of 10,000,000. The point when the Blue Line (Total Revenue) intersects Red Line (Total Costs), gives us the break even unit quantity. This is the point on which the company has no profit/no loss. This is the number of units the company has to produce in order to cover its costs to avoid losses thus break even. In this particular case, the break even quantity is 4,845,600 units.