Your CEO has limited knowledge of management accounting but of course, is vitally interested in forecasting profitability under different scenarios. He asked you, the management accountant, to begin your report by answering a few basic questions he's always wondered about. He has also given you some data to review and has asked you to report on the expected profitability under some given scenarios.
Company Data:
Company's average selling price (SP) per unit = P40
Product's variable cost per unit = P28
Company's budgeted fixed costs for the upcoming year are expected to be P 1,000,000
you need to complete the following:
Write a report of 200-300 words including the following
Report: Forecasting Profitability under Different Scenarios
Introduction:
In order to provide insights into the expected profitability of our company under different scenarios, we need to consider several factors such as the selling price per unit, variable costs, and fixed costs. By analyzing these key elements, we can derive a clearer understanding of our financial outlook.
Average Selling Price per Unit:
The first important factor to consider is the average selling price per unit (SP), which in our case is P40. This refers to the amount of money we receive from each unit sold. By multiplying the selling price per unit with the quantity of units sold, we can obtain our total sales revenue.
Variable Costs per Unit:
Next, we need to examine the variable costs associated with producing each unit of our product. In our case, the variable cost per unit is P28. These costs include direct materials, direct labor, and other expenses that vary in proportion to the level of production. By multiplying the variable cost per unit with the quantity of units sold, we obtain our total variable costs.
Fixed Costs:
In addition to variable costs, our company incurs fixed costs, which do not change regardless of the level of production. The budgeted fixed costs for the upcoming year are expected to be P1,000,000. These costs include rent, salaries, insurance, and other fixed expenses necessary to operate our business.
Profitability Analysis:
To determine the expected profitability under different scenarios, we need to calculate the contribution margin, which represents the amount available to cover fixed costs and generate a profit.
Contribution Margin = Selling Price per Unit - Variable Cost per Unit
By subtracting the variable cost per unit from the selling price per unit, we can determine the contribution margin. This margin indicates the portion of each unit's revenue that contributes towards covering fixed costs and generating profit.
Once we have the contribution margin, we can calculate the breakeven point, which represents the number of units we need to sell to cover all our fixed costs. This can be determined by dividing the total fixed costs by the contribution margin.
Now, let's apply this analysis to different scenarios or levels of sales, and calculate the expected profitability. By multiplying our selling price per unit with the quantity of units sold, we can determine our total sales revenue. We can then subtract the total variable costs and fixed costs to obtain the expected profit.
Conclusion:
In conclusion, by analyzing the average selling price per unit, variable costs per unit, and fixed costs, we can forecast the expected profitability of our company under different scenarios. By calculating the contribution margin and breakeven point, we gain insights into the financial dynamics of our business. This analysis can be used to make informed decisions and develop strategies to enhance profitability in the future.