CVP Modeling project
The purpose of this project is to give you experience creating a multiproduct profitability
analysis that can be used to determine the effects of changing business conditions on the
client's financial position. Your goal will be to use Excel in such a way that any changes to
the assumptions will correctly ripple through the entire profitability analysis. If executed
properly, the client should be able to use this spreadsheet over and over, using different
"what if" assumptions.
Business Description
After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet
supplies at trade shows. He has two products:
Product 1: "Launch-it"- a tennis ball thrower that will sell for $10.
Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the dog
places his paw on the pedal. The treat dispenser will sell for $30.
Costs: Jake has hired an employee to work the trade show booths. The work contract is
$1,000 per month plus a commission equal to 10% of revenue. Jake will also spend $500
per month on trade-show entry fees. Jake is purchasing the products from a supplier in
Mexico. Launch-its cost $1 each; Treat-times cost $7 each. Shipping and handling on
the Launch-its will cost $2 each; Shipping and handling on the Treat-times, which are
heavier, will cost $8 each. The shipping and handling costs will be paid by Jake, not the
customer.
Assume Jake expects to sell 200 Launch-its and 100 Treat-times during his first month of
operations (June).
Jake's financial goal is to earn an operating income of $8,000 per month. He believes
volume may grow at a rate of 5% a month.
Directions
You have been hired by Jake to build a CVP model that will help him understand the impact of busines
operating income. (See "Starting File" worksheet.) In your model, all of the original assumptions will b
the spreadsheet (blue box). All other calculations in the model will reference the assumptions (blue b
assumption changes, the effect will ripple through the entire model. To accomplish this goal, you wil
rather than numbers, in every other cell in the worksheet. In other words, the only place you will typ
assumptions box.
FORMATTING conventions to use throughout project:
- Round all UNITS to the nearest whole unit. Use the "decrease decimals" button on your tool bar rath
Rounding function.
- Show all MONETARY amounts as dollars and cents. Round to the nearest cent. ($[Link]). Use the "decr
button rather than the rounding function.
- Show all percentages as %, not as decimals. (x%, not .xx)
- Right justify all cells (numbers should be to the right side of the cell, not in the middle or left)
1) Complete the assumptions (blue box) based on the data about Jake's business. Identify and list all
separately and all fixed costs separately before finding the total for each type of cost.
2) Complete the Product Analysis (yellow boxes) assuming Jake ONLY sells either Product #1 (Launch-it
(Treat -times).
Check figures: B/E Product #1 = 250 units; B/E Product #2= 125 units
3) Complete the pro forma CM Income Statement for the month of June (green box). HINT: On produ
statements such as this, the fixed costs are only listed in the total column. Make sure you also show t
line items. Finally, calculate the overall WACM% for the company.
Check figure: Operating income = $900 WACM% = 48%
4) Calculate the weighted average contribution margin (WACM) per unit (in orange box).
Check figure: WACM/unit = $8.00
5) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven (TOTAL column i
THEN, calculate the number of EACH type of product needed to breakeven. Finally, calculate the sal
associated with this volume for EACH product, and then the sales revenue to breakeven in total.
Check figures: B/E Product #1 = 125; B/E Product #2= 63
6) Use the WACM/unit to calculate the total number of units needed to achieve Jake's target profit (T
second gray box). THEN, calculate the number of EACH type of product needed to achieve the targe
calculate sales revenue associated with this volume for EACH product, and then the sales revenue in t
Check figures: B/E Product #1 =792; B/E Product #2= 396
7) Calculate the MOS using June sales as the expected sales (purple box). Calculate the MOS in terms
as a percentage. Also calculate the current operating leverage factor (round to the nearest 2 decimal
determine the expected percentage change in operating income stemming from an expected change
Check figures: MOS%= 38%; Operating leverage factor= 2.67
8) Change name of worksheet to "Original Assumptions".
9) Make sure you have cleaned up your worksheet using the formatting conventions listed above.
10) Go to the "Advising client" worksheet and follow the directions found there.
impact of business conditions on his
assumptions will be listed one area of
sumptions (blue box) such that if any
this goal, you will use FORMULAs,
place you will type numbers is the blue
n your tool bar rather than the
xx). Use the "decrease decimals"
ddle or left)
dentify and list all variable costs
t.
duct #1 (Launch-its) OR Product #2
. HINT: On product line income
re you also show the totals for all other
ox).
n (TOTAL column in the first gray box).
, calculate the sales revenue
ven in total.
e's target profit (TOTAL column in the
achieve the target profit. Finally,
sales revenue in total.
he MOS in terms of sales revenue and
nearest 2 decimal places) and use it to
expected change in sales volume.
listed above.
CVP Model
ASSUMPTIONS Product #1 Launch-it
Product #1: Launch-it Unit CM $ 6.00
Sales price per unit 10 CM % 60%
Variable costs per unit: Breakeven point:
Commission 1 -in units 250
Suppliers 1 -in sales revenue $ 2,500.00
Shipping 2
Total variable cost per unit 4 Target profit volume:
-in units 1583
Monthly volume 200 -in sales revenue $ 15,833.33
Product #2: Treat-time
Sales price per unit 30 Product #2 Treat-time
Variable costs per unit: Unit CM $ 12.00
Commission 3 CM % 40%
Suppliers 7 Breakeven point:
Shipping 8 -in units $ 125.00
Total variable cost per unit 18 -in sales revenue $ 3,750.00
Monthly volume 100 Target profit volume:
-in units $ 791.67
Fixed costs per month: -in sales revenue $ 23,750.00
Work contract 1000
Trade-show entry fees 500
Total fixed costs per month 1500
Target profit per month 8000
Expected change in volume (%) 5%
CVP Model
Jake's Pet Supplies
Pro Forma Contribution Margin Income Statement
For the month ending June 30
Product #1 Product #2 Total
Sales 2000 3000 5000
Variable costs 800 1800 2600
Contribution margin 1200 1200 2400
Fixed expenses 1,500
Operating income 900
WACM % 60% 40% 48%
Calculation of Weighted average CM per unit
Product #1 Product #2 Total
Contribution margin 1200 1200 2400
Unit 200 100 300
Unit CM $6.00 $12.00 $8.00
Weight in units 0.6666666667 0.3333333333 1
Weighted average 4 4 8
WACM/unit 8
Multiproduct Breakeven point: Product #1 Product #2 Total
-in units 125 62.5 187.5
Sales revenue at breakeven 1250 1875 3125
Multiproduct Target profit point: Product #1 Product #2 Total
-in units 791.666666667 395.8333333 1187.5
Sales revenue at target profit 7916.66666667 11875 19791.6666667
Margin of Safety (in $) 750
Margin of Safety % 0.375
Operating Leverage Factor 2.6666666667
Expected % change in operating income (%) 0.1333333333
EXCEL HINT: To copy an entire wo
bottom of the screen and choose
Once you have the copy, choose "
Once you have built the model, use it to answer Jake's questions about his business.
Treat each situation as a separate scenario. All comparisons should be made to the
original assumptions.
1. Save a copy of your original model to a new spreadsheet called "supplier cost
increase". Say the supplier is expected to increase the cost of the products by 20%.
What is the new operating income? What is the new WACM%? What is the new MOS%?
Briefly explain your findings to the client.
2. Save a copy of your original model to a new spreadsheet called "new sales mix". Say
the monthly sales volume is now expected to be 175 "Treat-times" and 125
"Launch-its" (same total units, but a different sales mix). What is the new operating
income? What is the new WACM/unit ? Given this sales mix, how many units (in total)
will Jake need to sell to earn his target profit? Briefly explain your findings to the client.
3. Save a copy of your original model to a new spreadsheet called "alternative contract".
Say Jake's employee wanted to negotiate a different work contract: $1,500 per month
plus 5% of revenue. Given his original sales volume and mix, how would this contract
have changed Jake's operating income? What is the new operating leverage factor?
What is the new expected percentage change in operating income if volume increases as
expected in the future? Briefly explain your findings to the client.
EXCEL HINT: To copy an entire worksheet, right click on the worksheet tab at the
bottom of the screen and choose "Move or Copy". Then check the "create a copy" box.
Once you have the copy, choose "rename".
EXCEL HINT: To copy a cell from a different worksheet, put a
want the number to go, and then go back to the original work
on the cell, and then press enter.
NEW ORIGINAL Change
Operating income $720.00 $900.00 ($180.00) Brief explanation: An increase in cost
in operating expense by $180 and also
WACM(%) falls due to the increase of b
WACM percentage 44% 48% -4% change of variable cost. This action of s
long distance to reach his target profit
MOS% 32% 38% -5%
Operating income $1,050.00 $900.00 $150.00 Brief explanation: By the change of n
product, Jake gains more operating inc
causes the change in WACM/unit. Mo
WACM/unit $8.50 $8.00 $0.50 to reach the target profit for 70 units d
Units to earn target profit 1118 1188 -70
Operating income $650.00 $900.00 ($250.00) Brief explanation: By the change of th
$1,500 of work contract with 5% of sale
in operating income. However, it can b
Operating leverage factor $4.08 $2.67 $1.41 operating leverage factor rises double a
operating income increases by 7%.
Expected % change in op inc $0.20 $0.13 $0.07
m a different worksheet, put a + in the cell where you
en go back to the original worksheet, put your cursor
r.
anation: An increase in cost of products causes the decrease
ting expense by $180 and also in WACM (%) and MOS%.
%) falls due to the increase of break-even point of units with
f variable cost. This action of supplier makes Jake have more a
ance to reach his target profit by selling more units.
planation: By the change of number of units sold for each
Jake gains more operating income by $150. And this obviously
he change in WACM/unit. Moreover, it helps Jake reduce units
the target profit for 70 units deducted.
lanation: By the change of the agreement of contract for
f work contract with 5% of sale commission, it causes a decrease
ting income. However, it can be seen a brightly future that
g leverage factor rises double and also expected % change in
g income increases by 7%.
