Applying CVP to the Aviation Industry
Introduction
One important tool business owners and managers use to make strategic decisions is the cost-volume-profit analysis. This analysis helps managers decide set prices, develop budgets, set sales goals, and take calculated risks. Managers must know the volume and product prices required to remain profitable. The CVP analysis provides this information. In this assignment you will practice using a CVP analysis to help key executives make important business decisions.
Wolverine Aircraft Manufacturing manufactures a small single-engine aircraft for general aviation use, the Wolverine Trainer. The company is currently faring well and is looking to expand in the near future. Bill Wolf, the company’s CEO, needs some basic questions answered in order to make decisions on when and how to expand. In this assignment, you will serve as Wolverine Aircraft’s managerial accountant and prepare the information Bill needs to make his decision.
Below you will find last month’s contribution income statement.
| Contribution Income Statement Sales of 5 Aircraft |
||
| Total | Per Unit | |
| Sales (5 aircraft) | $ 950,000 | $190,000 |
| Variable Expenses | 285,000 | 57,000 |
| Contribution Margin | 665,000 | 133,000 |
| Fixed Expenses | 300,000 | |
| Net Operating Income | $ 365,000 | |
Instructions
Prepare the following in a document for Bill:
- Calculate the break-even point for Wolverine Aircraft.
- The advertising department believes a $150,000 increase to their budgeted expenses will yield total sales of 8 aircraft per month. Would you advise Bill to allow this budget increase? How will this affect the company’s overall profits?
- Bill would like the company to obtain profits of $500,000 a month. At the current pricing and cost structure, how many aircraft would Wolverine Aircraft need to sell to reach this goal?
- What is Wolverine Aircraft’s margin of safety? Why is this number important?
