ACC 311 Module 5 Cost-Volume-Profit Assignment Example

Can the Spreader Pay Its Way? Cost-Volume-Profit Analysis of a New Tailgate Salt Spreader

[Student Name]

Southern New Hampshire University

ACC 311: Cost Accounting

Module Five Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Can the Spreader Pay Its Way? Cost-Volume-Profit Analysis of a New Tailgate Salt Spreader

Introduction

Kettle River Truck Equipment has designed a tailgate salt spreader for pickup trucks and light-duty dump bodies, a product its dealers have asked for because municipal and contractor customers buy spreaders alongside plows. Before committing to tooling, the owner wants to know how many spreaders the shop must sell to cover the costs of launching the line, how many it needs to earn a worthwhile profit and how much room there is for error. Cost-volume-profit analysis answers those questions by separating costs into those that change with each unit sold and those that do not (Datar & Rajan, 2021). This paper applies it to the spreader, tests two risks and recommends whether to launch.

Price and Cost Assumptions

The planned dealer price is $4,800 per spreader. Variable costs per unit were estimated from the engineering bill of materials and a pilot build of five units, and fixed costs are the annual costs added by the new line.

Table 1. Price and Cost Assumptions

Covering the Fixed Costs

Each spreader earns its price less its variable cost, $4,800 minus $3,240, or $1,560. The contribution margin ratio is $1,560 divided by $4,800, or 32.5 percent, so each dollar of spreader sales contributes 32.5 cents toward fixed costs and profit.

Table 2. Break-Even and Target Profit

The shop must sell 161 spreaders a year to cover the line's fixed costs. The $140,000 target, which the owner set as the return needed to justify the tooling investment, requires 250 units, or $1.2 million in sales.

Expected Results and Margin of Safety

Dealers have indicated orders for about 300 spreaders in the first full season.

Table 3. Contribution Income Statement at 300 Units

The margin of safety is expected sales minus break-even sales, $1,440,000 minus $769,231, or $670,769, which is 46.6 percent of expected sales. Sales could fall by nearly half before the line lost money. Dividing contribution margin by operating income, $468,000 by $218,000, gives a multiplier of 2.15, the measure textbooks attach to operating risk. A 10 percent drop in spreader sales would therefore reduce operating income by about 21.5 percent, and a 10 percent rise would increase it by the same proportion. A multiplier at this level is moderate, reflecting a line whose fixed costs are significant but well covered at expected volume.

Sensitivity Analysis

Two risks concern the owner most. Steel prices rose sharply in each of the last three winters, and a competitor already sells a similar spreader for about $4,500.

Table 4. What-If Cases

An 8 percent rise in materials cost raises break-even by 22 units. A price cut to match the competitor raises it by 36 units and cuts operating income at 300 units to $132,500, just short of the target. Both cases still leave the line profitable at the forecast, but a price cut and a steel increase together would leave little margin for a weak winter. Combining the two, a $4,500 price with materials at $2,538, gives variable cost of $3,413 and a contribution margin of $1,087, pushing break-even to 230 units. At 300 units that combination would earn $76,100, about half the target, which is the scenario the owner should plan against rather than hope to avoid.

A third question is how many units the shop could lose to a mild winter. Over the last ten seasons, dealer plow orders fell by as much as 35 percent in the two warmest years. Applied to the 300-unit forecast, a 35 percent shortfall leaves 195 units, still above the base-case break-even of 161 but below the 197 needed if the price had been cut. The spreader can survive a bad winter or a price war, but probably not both in its first year.

Assumptions and Limits

These results depend on the standard CVP assumptions: a constant selling price, variable cost per unit that does not change with volume and fixed costs that stay fixed within the relevant range of roughly 100 to 450 units. Above about 450 units the shop would need a second shift and another supervisor, so fixed costs would step up. Demand for spreaders also depends on the weather, which no forecast controls. The split between fixed and variable cost is itself an estimate: Labro (2019) observes that many overhead costs that behave as fixed in the short run become variable over longer periods, and the variable overhead figure of $240 here comes from only five pilot units. Hansen et al. (2003) note that budgets and plans built on a single forecast can create a false sense of precision; presenting a range of cases, as in Table 4, is a partial answer.

Recommendation

The shop should launch the spreader at $4,800. Break-even of 161 units is well below the 300 units dealers have signaled, the margin of safety is close to half of expected sales, and the line stays profitable under either single risk tested. To protect the margin, the purchasing manager should lock in steel for the first season's production before November, and the owner should resist matching the competitor's price until first-season sales show whether dealers value the shop's faster delivery and local service enough to pay the difference. A review in April, once the season's orders are known, should compare actual units and costs with Table 3 before tooling for a second model is approved.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Hansen, S. C., Otley, D. T., & Van der Stede, W. A. (2003). Practice developments in budgeting: An overview and research perspective. Journal of Management Accounting Research, 15(1), 95-116. https://doi.org/10.2308/jmar.2003.15.1.95

Labro, E. (2019). Costing systems. Foundations and Trends in Accounting, 13(3-4), 267-404. https://doi.org/10.1561/1400000058