4. 1.0 Issues & Assumptions
Case background:
Datuk Kassim has a small publishing company.
He kept it simple with minimum investment.
He managed to earn profit in its early stage.
Company suddenly gain publicity thus increase sales by 25%
To fulfil demand, he began to invest heavily in machinery and
equipments.
Result in high investment, he only earn 16¢ profit from every RM1 sold.
Situation getting worse, his sales drop 25% from previous peak level.
5. 1.0 Issues & Assumptions
Underlying issues found in Datuk Kassim case are:
Datuk Kassim has no detail planning and budgeting
for his business.
Due to above, Datuk Kassim is struggling to meet
the load of monthly expenses to keep his business
afloat.
6. 1.0 Issues & Assumptions
Assumptions made before analyze the case:
Datuk Kassim’s business publishes books and in average each
RM100
book is published and sells at
Datuk Kassim sold books monthly on average of 1000 units
Monthly expenses on factory rent, machinery equipment,
RM40,000
employee salary is estimated at
Printing & royalty fees to writers per book is at RM84
His knowledge on budgetary planning None
8. 2.0 Analysis
Datuk Kasim need to understand his business cost behavior:
Variable Cost
COST BEHAVIOUR
Fixed Cost
Mixed Cost
9. 2.0 Analysis
Datuk Kasim also need to understand his Cost-Volume Profit analysis:
COST
PROFIT
VOLUME
But first he needs to adhere with CVP analysis assumptions:
The behavior of both costs and revenues is linear throughout the publishing activity.
Costs are either fixed or variable.
Number of books published is the only factor affecting costs.
All units published are sold.
When more than one book published, the sales mix will remain constant.
10. 2.0 Analysis
CONTRIBUTION MARGIN (CM):
CM per unit = Unit Selling Price - Unit Variable Cost
= RM100 - RM84
= RM16
CONTRIBUTION MARGIN RATIO (CM Ratio):
CM Ratio = CM per Unit
Unit Selling Price
= RM16/RM100
= 0.16 or 16%
11. 2.0 Analysis
CVP Income statement for Datuk Kassim business:
st
CVP Income Statement for Month Ended 31 Aug 2010
Total (RM) Per Unit (RM)
Sales (1,000 books) 100,000 100
Variable Cost 84,000 84
Contribution Margin 16,000 16
Fixed Cost 40,000
Net Income -24,000
12. 2.0 Analysis
BREAK EVEN POINT (BEP):
Break Even Point = Fixed Cost
CM per Unit
= RM40,000 / RM16
= 2,500 unit of books sold
MARGIN OF SAFETY RATIO (MoS Ratio):
Margin of Safety Ratio = (Actual Sales - Break Even Sales)
Actual Sales
= (RM100,000 - RM250,000) / RM100,000
= -1.5
14. 3.0 Management Action (Way Forward)
Reason of understanding and applying of CVP analysis concept:
1. Determine product mix
2. Maximizing use of production facilities
3. Setting selling prices
Elements to be analyzed :
variable costs Sales Volume
CVP
fixed costs
Mix of product sold
Selling price
15. 3.0 Management Action & Solutions
3.1 VARIABLE COST PER UNIT
Contribution = Unit Selling - Unit Variable
Margin Price Cost
Break-Even = Fixed Cost Variable Cost
Point Contribution Margin
Dir/Mat
reducing variables cost will give a direct impact Dir/Machine hrs
to get a higher CM and as well a lower break-
even Dir/ Labor
Dir/energy
CONTRIBUTION
MARGIN
16. 3.0 Management Action & Solutions
3.2 TOTAL FIXED COST
Break-Even = Fixed Cost
Point Contribution Margin
FIXED COST Net = Contribution - Fixed
Profit Margin Cost
M/C deprec.
insurance reducing the total fixed cost will help
the business to achieve low BEP per
Loan interest unit book – meaning a higher net
income per unit book will gained.
Factory rental
Admin staff
wages
17. 3.0 Management Action & Solutions
3.3 EFFECT OF SALES VOLUME ON PROFIT
able to assess early prediction and determine how
accurate the gross sales volume level, and monitor the
sales volume whether it is actually on track to make the
profits or otherwise.
SALES = VARIABLE + FIXED + TARGET
COST COST NET INCOME
Therefore, at a given selling price (e.g. RM100/unit),
target net income, fixed cost and variables - sales
volume can be determined required to achieve desired
profit.
19. 3.0 Management Action & Solutions
3.4 UNIT SELLING PRICE
Contribution = Unit Selling - Unit Variable
Margin Price Cost
TARGET NET = CONTRIBUTION - FIXED
INCOME MARGIN COST
20. 3.0 Management Action & Solutions
3.5 SALES MIXED
SALES MIX = SALES OF INDIVIDUAL PRODUCT
TOTAL SALES OF THE COMPANY
WEIGHTED-AVERAGE = (UNIT CM X SALES MIX %) + (UNIT CM X SALES MIX %)
UNIT CM
BEP = FIXED COST
WEIGHTED-AVERAGE UNIT CM
22. 4.0 Future Strategy & Recommendations
RECOMENDATIONS
To have a business plan
BUSINESS PLAN
Conduct market research on new product & innovative
MARKET RESEARCH Widen product range covering high-end to low-end
PARTNETSHIP & VENDORS
Sub-contracting the printing process & binderies
Hire freelance to do editing, proof-reading & layout.
To venture into new technology
NEW TECHNOLOGY
e-books, print on demand, accessible publishing
23. 4.0 Future Strategy & Recommendations
RECOMENDATIONS
Have a proper financial planning.
Ensure his business is liquid & ultimately profitable
FINANCIAL PLAN
Apply for financial facility like Revolving Credit or Overdraft
Use to determine company long term investment
CAPITAL BUDGETING To implement Cash Payback Technique
To prepare for budgetary planning for control & evaluation
BUDGETARY PLANNING To ensure business run on pre-allocated budget
To use master budget
25. 5.0 Conclusion
By now Datuk Kassim should :
Understand & know the importance of having basic business knowledge.
Know it is important to know the impact of changes in market condition &
customer demand to his business.
Gain better understanding of his business structure, competitive advantage
and capital requirements.
Restructure, have new business plan, have a strategic plan and make a
proper budget
With our future recommendations & a master budget:
Datuk Kassim can have ideas on how to manage his
business effectively thus allow him to project future cash
flow.
27. 4.0 Future Strategy & Recommendations
Cost Of Capital Annual Cash = Cash Payback
Investment Inflow Period
Assume RM12K spent on a machine with useful lifetime of 8 years.
Annual Saving of 6K in cash outflows are expected from operations.
Cash Income per year = Net Income + Depreciation Expense
Thus, P = RM12K / RM6K = 2 YEARS