Report and Contribution Margin Per Unit 6 Breakeven Analysis

Report Topic: Determining Manufacturing Cost of a Product and Performing
CVP Analysis

 

 

Submission to: Bushra Ferdous Khan
(BFK)

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                           Department of
Accounting and Finance

                           School of Business
and Economics

                            North South
University

 

Course: Managerial Accounting (ACT202)

Section- 07, Fall 2017

Submitted by:

Akif Monir Shommo 1631042030

Maheem Khondoker 1631571030

Fariha Masuk 1631427030

Sadia Rahman Misty 1632696030

Rafiul Amin 1632687030

 

 

December
29, 2017

 

Bushra Ferdous Khan

 

Lecturer,

 

School of
Business& Economics, North South University

 

 

Subject: Determining
Manufacturing Cost of a Product and Performing CVP Analysis.

 

 

Dear Madam,

 

We are
submitting our Project entitled “Determining Manufacturing Cost of a Product
and Performing CVP Analysis” of our handmade soap named “Elysian Organic Soap”
as per your instruction to fulfil the requirement of the Introduction to
Managerial Accounting course.

 

We fixed
handmade soap as our product to present the report.

 

We are
ensuring you the legitimacy of this report. We sincerely hope that this report
will get your approval. We are grateful to you for giving us the opportunity to
work on this kind of knowledgeable project and thank you miss for guiding us
always throughout the entire course.

 

Yours
sincerely,

 

On behalf
of all team members,

 

Akif Monir
Shommo

 

 

Table of Content

 

 

 

Topic

Page

 

Executive Summary

1

 

Introduction
 

2

 

Production process
 

3

 

Cost
Identification for the Business
 

4

 

Calculating Pre-determined Overhead Rate for applying
manufacturing overhead and manufacturing cost per unit
 

5

 

Cost-
Volume- Profit (CVP) Analysis and Contribution Margin Per Unit
 
 

6
 

 

Breakeven Analysis

7

 

Degree
of Operating Leverage

7

 

Conclusion
 

8

 

 

 

 

Executive Summary:

 

 

For our project we
have chosen to work on Handmade Organic soap. Our product Elysian Organic Soap
is a business focused on selling organic handmade bars of soap. The handmade
bars of soap are created and produced in small batches and are being developed
by using natural ingredients. We strongly believe “Quality over Quantity,
saying this we will be producing in less quantity so that we can ensure
quality.

 

We have collected all
necessary information needed from the internet and used it to prepare this
report which has the manufacturing cost of our product along with all the costs
identified. We also have done a Cost-Volume-Profit analysis (CVP) as well as a
graph which shows the relationship between the cost of units produced and the
volume of units produced using fixed costs, total costs, and total sales.

 

 

 

 

 

 

 

 

 

 

INTRODUCTION:

 

Homemade soaps have always been beneficial for people
due to many reasons with the ingredients used topping the list of benefits.
General ingredients like almond oil and olive oil and both natural ingredients
that are rich in antioxidants, vitamins and nutrients that are essential to
healthy skin. Over the years, more positive responses have come from customers
who have used homemade/handmade soaps, relieving them of itchiness, dryness and
skin conditions such as eczema, psoriasis and acne. Even though it can get very
expensive for higher purposes, general homemade soaps are very cheap and
regular use may prevents skin problems from occurring and keep the skin fresh
and lively.

Thinking of all these benefits, we have come up with a business plan to make
inexpensive homemade soaps for the local market. We plan on providing these
soaps with the intention of helping the common people while making satisfactory
profit and do so by causing minimal/no environmental pollution. Unlike
manufactured soaps, large chemical factories, which cause numerous harm to the
wildlife and environment, are not required. The name of our soap will be Elysian Organics.

This report is to explain all the details of Elysian Organics’ soap. Our soaps will
have a general purpose of good skin and it will be made from almond and olive
oil, vitamin E oil, Lye, water and lastly fragrance added. Our product will be
made available in the local retail shops.

Further use of this report is to explain the production process and identify
the product costs and period costs of the product. Also after identifying the
variable and fixed costs of the business, we intend to show the pre-determined
overhead rate for applying manufacturing overhead, manufacturing cost per unit,
determining the unit selling price and provide a CVP analysis based on all our
findings.

PRODUCTION PROCESS:

 

 

Since the soaps are homemade we do not require any big
factory machines and the steps are quite easy.

The first step for our production process is to
measure out the oils we will need to make the soap and pour it into a slow
cooker. As the oils are heating, we will measure both the lye and water
separately. Then pour the water in a large jar and slowly start adding the lye
to the water and stir it together. This stirring will create a cloudy white
mixture and will eventually get very hot. We will then let this mixture set for
10 minutes so that it becomes clear.

Afterwards we need to add this mixture to the oils,
which have been heating on the slow-cooker, and start to stir all of it
together till it is all evenly mixed. It will be kept on low heat to thicken
which would take about 35-55 minutes. After it is done we turn off the heat and
add the essential fragrance oil for the scent. And lastly we take a spoon and
pour this mixture into molds and cover with parchment paper and set in a cool,
dry place.

After 24 hours we pop the soaps out of the mold and
it’s ready for packaging.

 

 

 

 

 

 

 

 

 

 

Cost Identification for the Business:

 

The
aim of the company is to have 2 labors producing 10 soaps in batches per day.
That is 560 soaps in a month.
 
Direct
labor:
18.51
taka per direct labor hour
Required
DLH for 1 unit: 2 hours – 37.02 DLH per piece
 
Manufacturing
Overheads:
Fixed Manufacturing Overheads:
Rent- 12000 taka
Gas
and electricity- 4500 taka
Non-cash
cost (depreciation) included in fixed manufacturing overhead – 1000taka
 
Cost of Producing One Soap:
 

Cost Item

Price

Required

Cost per unit (Taka)

Total Cost ( 560 per month)

Almond Oil

1 litre @1200 taka

32 ml

38.4

21,504

Olive Oil

1
litre @800 taka

32
ml

25.6

14,336

Vitamin E capsules

Per piece @ 4 taka

2 capsules

8

4480

Lye

1kg
@40 taka

9
gram

0.36

201.6

Water

1 litre @ 0.0336taka

25 ml

0.84

470.4

Fragrance

1
litre @ 800taka

2
ml

1.6

896

Packaging

2 taka per packet

1 packet

2

1120

 

Pre-determined Overhead Rate for applying Manufacturing
Overhead:
 

Our total units produced for the month is 560 units
and we assume to sell 500 units. Our allocation base for the business is direct
labor hour.
Our fixed manufacturing overheads are rent, gas and electricity and equipment
depreciation and their values are 12000 taka, 4500 taka and 1000 taka
respectively. We have no variable
manufacturing as we are starting off on a very low scale production method.

POHR: Total MOH/Total direct labor hours
            = 17500/112
            =156.25 taka per unit.

 

CALCULATING
MANUFACTURING COST PER UNIT:

The
manufacturing cost per unit is calculated by adding the total direct material,
direct labor costs and the applied manufacturing overhead. It is calculated by
multiplying POHR with actual hours worked. The estimated total DLH and actual
hours worked is the same for our company. Thus,

 

 

 

Direct
material (74.8 ×560 )

41888
taka

Direct
labor ( 112 × 18.51 ×10 )*

20731.2
taka

Manufacturing
OH ( 156.25 × 112 )

17500
taka

Total
manufacturing OH

80119.2
taka

Per
unit manufacturing cost(80119.2/560)

143.07
taka

 Cost Volume Profit Analysis:

Cost-volume profit (CVP) analysis is based upon determining
the breakeven point of cost and volume of goods and can be useful for managers
making short-term economic decisions.

CVP analysis is concerned with the impact varying
levels of sales and product costs have on operating profit. CVP analysis is only
reliable if costs are fixed within a specified production level. All units
produced are assumed to be sold and all costs must be variable or fixed in a
CVP analysis. Another assumption is, all changes in expenses occur because of
changes in activity level. Semi-variable expenses must be split between expense
classifications using the high-low method, or scatter plot.

Keeping an overall aim at establishing a new brand and
with the target of catching a large market segment by keeping our product
generally inexpensive, we have decided to charge taka 240 for our soap. This is
to have a unique price value while keeping the price below 250 for
psychological effect. A further important reason is that we intend to reach our
break-even point at an early stage to make a comparatively reasonable profit
under appropriate circumstances.

 

Contribution Margin
Per Unit:

 

 

Sales
(500* × 240 )

120000
taka

Total
Variable Cost  ( 113.82 × 500 )

56910
taka

Total
Contribution Margin

63090
taka

Contribution
Margin Per Unit (63090/500)

126.18
taka

* 500 based on the
assumption that we expect to sell at least 500
units

BREAK-EVEN Analysis:

Contribution Margin: Total contribution / Sales =

63090/
120000=

0.52575

 

Thus the break-even point in sales is fixed costs
divided by contribution margin. It tells the amount in which net profit is 0.
Break in units can be found out by dividing the resulting answer by the selling
price.

Break
even in sales =

17500/
0.52575 =

33285.78
taka

Break
even in units =

33285.78/
240 =

138.69
= 139 units

 

Degree of Operating Leverage:

The degree of operating leverage (DOL)
is a measure used to evaluate how a company’s operating income
changes with respect to a percentage change in its sales. A company with a
high degree of operating leverage has high fixed costs
relative to its variable costs.
It is calculated by dividing the contribution margin with the company’s net
operating income:

63090/
45590* =

1.38

*since 500 units are
expected to be sold, (500×240) – (500×113.82) – 17500 = 45990

 

Conclusion:

 

We hope that Elysian Organics will be able to create a
positive impact on the minds of our customers and pass on the fact that
homemade soaps made from natural ingredients are very good for skin, and are
more beneficial than chemically manufactured soaps. Our main goal is to satisfy
our customers and provide them with reasonably cheap but qualitative products.

We have future plans to extend by bringing out
variations in our soap and further extend by making specific soaps for specific
but multiple purposes. Investment in bigger equipment and more capital is in
our minds along with expansion of our market all over Dhaka. Who knows, if our
customers are greatly satisfied with our products, large scale production for
all of Bangladesh is a vision not far away.

In conclusion, all our hopes and plans center around
one big factor and that is customer satisfaction. Thus we say, “We provide
for you.”

 

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