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Financial and Cost Volume Profit Models (cont’d)

Financial and Cost Volume Profit Models (cont’d). Class Announcements. See SCC for information on information sessions Assignment #1 due September 19th (today) Assignment #2 due September 26 th (available on-line) Business Society Golf Tournament (Daily Schwartz on Facebook)

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Financial and Cost Volume Profit Models (cont’d)

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  1. Financial and Cost Volume Profit Models (cont’d)

  2. Class Announcements • See SCC for information on information sessions • Assignment #1 due September 19th (today) • Assignment #2 due September 26th (available on-line) • Business Society Golf Tournament (Daily Schwartz on Facebook) • Date: Saturday Sept 21st (Colin MacInnis, at x2010qbn) • Time: tee off times begin at 12:00pm • Location: Antigonish Golf & Country Club (87 Cloverville road) • Team size: 4 • Fee: $50/team member • Bloomberg Apptitude Test (BAP) • Info Session: Thursday September 19th in SCHW 205 at 5:15pm • Session: Friday September 27th at 10am in SCHW 252 (Free) • Contact: Campus Ambassador, Jake Baker atx2011cqv@stfx.ca

  3. Class Objectives • Cost Volume Profit (CVP) analysis as a simplistic but powerful form of financial modeling • The application of Cost Volume Profit (CVP) analysis to a context: Cloudwalkers

  4. Financial Models: CVP Analysis • Cost-Volume-Profit (CVP) analysis is the study of the effect of output volume on revenue, expense and net income • Managers use CVP analysis to try and obtain the most profitable combination of variable and fixed costs • Computers allow the manager to use a CVP modeling program to extensively and at minimal cost analyze relationships and to remove simplistic assumptions

  5. Financial Modeling: Sensitivity Analysis • CVP provides structure to answer a variety of “what-if” scenarios. • “What” happens to profit “if”: • Change in Fixed costs: • Changes in fixed expenses cause changes in the break-even point • If all else is the same the break-even will change at the same percentage as fixed costs change • Change in Selling Price • Change in Variable Costs • Change in Sales Mix

  6. Case: Cloudwalkers • Who: Rick Fodemesi, • Director and son of founder • What: 20,000 footwear order Sears • Why: Agree on price; • $23.75 wholesale vs. $15 to $18 • When: a few weeks, meeting scheduled

  7. Cloudwalkers: Company • Business began with footwear for people with sore feet • Expanded into footwear for women • Rick joined his Father after education in UWO • Manufacturing and retail sales operate in same building • Two product lines: • Cloudwalkers – casual sandal • Reactivators – dress sandal

  8. Cloudwalkers: Production • Current production • 3,000 pairs • Capacity • 26,000 pairs (500 x 52 weeks) • Additional Volume (Sears) • 20,000 pairs • Fixed costs • $9,000 (3000 @ $3) • Not easily traceable as wholesale and retail facilities are closely related • O/H includes: repair, maintenance, depreciation, rent, utilities • Additional Volume Fixed Costs • $700 (dye)

  9. Cloudwalkers: Costs

  10. Cloudwalkers: Profit (Status Quo)

  11. Cloudwalkers: CVP (Sears)

  12. Cloudwalkers: Sensitivity Analysis (Sears)

  13. Cloudwalkers: Qualitative • Sears is a large customer & would increase volume • From 3000 to 23,000 (20,000) • Eggs in one basket (90% of capacity to one customer) • Effect on other customers • Capacity limitation – could handle year 1 but not more than 23,000 pairs • Availability of labor pool • Son is younger and maybe more risk raking

  14. Cloudwalkers: Qualitative (Cont’d) • Availability of direct materials (e.g. soles from German suppliers were not received on a timely basis) • Sales target reasonability (i.e.. 20,000 hi/lo) • Any financing of increased direct materials and labor • How flexible is Cloudwalkers production process (i.e., can they meet an uneven demand requests)?

  15. Class Objectives • Cost Volume Profit (CVP) analysis as a simplistic but powerful form of financial modeling • The application of Cost Volume Profit (CVP) analysis to a context: Cloudwalkers

  16. Cost of an Egg: The Egg • Eggs offer egg-ceptional nutrition. Eggs are unique in that they contain nearly every nutrient known to be essential to humans.. • Eggs are one of nature's most nutritious foods. One large egg contains only 70 calories and an incredible amount of nutrition. • http://eggs.ca/egg-nutrition/whats-in-an-egg • Eggs resemble submarine hulls and are among the strongest things known to the human race.  Eggs are cylinders with arch-shaped ends, making them exceptionally strong. Try breaking one squeezing it end-to-end.

  17. Cost of an Egg Assignment • Due: November 28th • Worth: 10% • Format: Report form, 3 p. Maximum, single spaced, individual assignment, ID# only • Costs of egg production and delivery – the cost of an egg • Types of Costs of production, maintenance, delivery • Allocation of costs • Impact of regulation on costs and profitability • Cost management and cost efficiency • Resources: • Nova Scotia Egg Producers http://www.nsegg.ca/ • Egg Farmers of Canada http://eggs.ca/ • Nova Scotia Egg Producers’ Egg Regulations http://www.gov.ns.ca/just/regulations/regs/npeggreg.htm • Nova Scotia Department of Agriculture http://www.gov.ns.ca/agri/industry/poultry.shtml

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