Need help with my writing homework on Business: Sporting Sweatshirts. Write a 2500 word paper answering; Before proceeding with independent analysis of each of the proposals through CVP analysis, an in-depth study of the performance of the company for the year 2005 is required for comparative purposes. Accordingly, a contribution margin income statement is prepared hereunder on the year 2005 performance of Croydon Sweatshirts Ltd. showing computations for break-even sales:
The difference between selling price and variable cost is known as Contribution or Gross Margin or Contribution Margin. As the name suggests contribution margin contributes towards fixed costs and beyond that the resultant figure is profit for the business. Accordingly in CVP study contribution margin is the key factor in taking crucial decisions. Break even sales is regarded as point of no profit no loss. Breakeven is reached when contribution margin is enough to cover the fixed cost that was £800,000 during the year 2005. If the contribution margin enhances beyond this level, profit shall accrue to the business and if it is decreased from this level, loss shall be suffered by the business.
The breakeven point for 2005 was at the level of sale of £1,904,761.90. The contribution margin per shirt was £4.20. The noticeable feature of the proposal is that the operating profits in absolute terms have increased even with a lower P/V ratio and contribution margin per unit as compared to the performance in 2005.
The reason for this is that increased sales turnover has contributed a sizeable amount to surpass constant fixed costs resulting into increased operational results. That means CVP analysis is a handy tool to plan desired results. The company intends to earn £ 160,000. Accordingly the contributory margin required to achieve this target should be fixed costs (that is constant) . and the intended profits or 960,000 pounds. To achieve this target the company has to achieve a sale of . £298,136.65 as the contribution per unit is £3.22 Managing director’s view is that with a 10% reduction in price the company will be working at maximum capacity of 320,000 sweatshirts. To achieve this the company will be incurring advertising expenses, a fixed cost, to the tune of 60,000 pounds. The contribution margin at this maximum capacity will be 3.22 pound per sweatshirt and P/V ratio will
be 35.78% as shown in the following calculations.