The Dublin Shirt Company, Peter Clarke, University of Dublin
Question 1. A calculation of breakeven point (in units) for the year ended 2004. For the purpose of simplifying this calculation, you should assume that ONLY direct material and direct labor costs are considered variable with respect to changes in volume. Clearly identify your assumption regarding the sales mix in your calculation and specify why this assumption is important in the context of CPV analysis.
For this calculation certain assumptions were made.
-Sales prices remain unaltered: €6,60, €6,20 and €5,45 for XL, Large and Medium respectively. -The sales increase would be proportionately distributed over the 3 shirt sizes. To calculate these, the actual sales over 2004 were taken as a guideline to set a percentage which would distribute the shirts. (see calculation 1) -Only direct materials and direct labor were calculated as being variable when changing the volume. (see calculation 2) -Non-manufacturing overhead and selling and distributing overhead costs combined to form total administration expenses are taken as fixed costs. (see calculation 3) -Manufacturing overhead was calculated by multiplying sales quantity over 2004 by the assigned ‘Mfg overhead per unit’ (Calculation 4) -Customizing costs which total to €3.823.600,00 are taken as fixed costs. SalesPrice (2004)Sales Volume (2004)Sale Share in %
Var. CostsDirect materialsDirect labourTotal variable costs XL€ 0,60€ 0,40€ 1,00
Large€ 0,55€ 0,35€ 0,90
Medium€ 0,39€ 0,30€ 0,69
Non-manufacturing overhead€ 5.761.600,00
Selling and distributing overhead€ 3.584.450,00
Total: Administration expenses € 9.346.050,00
Manufacturing overheadSales Volume (2004)Mfg Overhead (per unit)Total Mfg Overhead XL544.000,00€ 0,24€ 130.560,00
Large655.000,00€ 0,21€ 137.550,00
Medium1.510.000,00€ 0,18€ 271.800,00
The Breakeven Point Calculation
For sake of simplicity X will be used to indicate the Breakeven Point Quantity in units.
Total Revenues = (€6,60*20,08%*X)+ (€6,20*24,18%*X)+ (€5,45*55,74%*X) -Each man’s size shirt price is multiplied proportionally by the Breakeven Point. Total Fixed Costs = €9.346.050,00 + €539.910,00 + €3.823.600,00 = €13.709.560,00 -Total Administration expenses + Manufacturing overhead + Customizing expenses Total Variable Costs = (€1,00*20,08%*X)+ (€0,90*24,18%*X)+ (€0,69*55,74%*X) -Each man’s size shirt variable costs (Direct materials + Direct labor) is multiplied proportionally by the Breakeven Point. The Breakeven Point is where the Revenues are equal to the Costs. Therefore the correct X will ensure that: Total Revenues – Total Fixed Costs – Total Variable Costs = 0
By applying this formula the resulting Breakeven Point in units corresponds to 2.709.803 units. In context of Cost Volume Profit analysis, which is an elementary way to calculate the Breakeven Point it is important to not make the calculation too difficult. Seeing as this form of cost based accounting is used to make short run decisions. If calculations were made to difficult they could not be made using simplified data sheets and superficial information.
Question 3. A determination of the profitability of each of the three customer groups together with an identification and discussion of the strategic issues that may arise from the results of your customer profitability analysis.
Firstly the profitability of each customer group and its size categories will be calculated. Secondly, the strategic issues will be discussed. In order to be able to do these calculations we need some assumptions. We used the following assumptions: -Each customer group sells their product at the average selling...