CVP Modeling Project
Directions
The purpose of this project is to give you experience creating a multiproduct profitability
analysis that can be used to determine the effects of changing business conditions on the
client’s financial position. Your goal will be to use Excel in such a way that any changes to the
assumptions will correctly ripple through the entire profitability analysis. If executed properly,
the client should be able to use this spreadsheet over and over, using different “what if”
assumptions.
You have been hired by Jake to build a CVP model that will help him understand the impact of business conditions on his
operating income. (See “Starting File” worksheet.) In your model, all of the original assumptions will be listed one area of the
spreadsheet (blue box). All other calculations in the model will reference the assumptions (blue box) such that if any
assumption changes, the effect will ripple through the entire model. To accomplish this goal, you will use FORMULAs, rather
than numbers, in every other cell in the worksheet. In other words, the only place you will type numbers is the blue
assumptions box.
Business Description
After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet
supplies at trade shows. He has two products:
Product 1: “Launch-it”- a tennis ball thrower that will sell for $10.
Product 2: “Treat-time”- an automatic treat dispenser that releases a treat when the dog
places his paw on the pedal. The treat dispenser will sell for $30.
Costs: Jake has hired an employee to work the trade show booths. The work contract is
$1,000 per month plus a commission equal to 10% of revenue. Jake will also spend $500 per
month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico.
Launch-its cost $1 each; Treat-times cost $7 each. Shipping and handling on the Launch-its
will cost $2 each; Shipping and handling on the Treat-times, which are heavier, will cost $8
each. The shipping and handling costs will be paid by Jake, not the customer.
FORMATTING conventions to use throughout project:
– Round all UNITS to the nearest whole unit. Use the “decrease decimals” button on your tool bar rather than the Rounding
function.
– Show all MONETARY amounts as dollars and cents. Round to the nearest cent. ($x.xx). Use the “decrease decimals” button
rather than the rounding function.
– Show all percentages as %, not as decimals. (x%, not .xx)
– Right justify all cells (numbers should be to the right side of the cell, not in the middle or left)
1) Complete the assumptions (blue box) based on the data about Jake’s business. Identify and list all variable costs
separately and all fixed costs separately before finding the total for each type of cost.
2) Complete the Product Analysis (yellow boxes) assuming Jake only sells either Product #1 (Launch-its) OR Product #2 (Treat times).
Check figures: B/E Product #1 = 250 units
Assume Jake expects to sell 200 Launch-its and 100 Treat-times during his first month of
operations (June).
3) Complete the pro forma Contribution Margin (CM) Income Statement for the month of June (green box). HINT: On
product line income statements such as this, the fixed costs are only listed in the total column. Make sure you also show t he
totals for all other line items. Finally, calculate the overall weighted average contribution margin percent (WACM%) for the
company.
Jake’s financial goal is to earn an operating income of $8,000 per month. He believes volume
may grow at a rate of 5% a month.
Check figure: Operating income = $900
4) Calculate the weighted average contribution margin (WACM) per unit (in orange box).
5) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven (TOTAL column in the first gray box).
THEN, calculate the number of EACH type of product needed to breakeven. Finally, calculate the sales revenue associated
with this volume for EACH product, and then the sales revenue to breakeven in total.
6) Use the WACM/unit to calculate the total number of units needed to achieve Jake’s target profit (TOTAL column in the
second gray box). THEN, calculate the number of EACH type of product needed to achieve the target profit. Finally,
calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total.
Check figures: B/E Product #1 =792
7) Calculate the MOS using June sales as the expected sales (purple box). Calculate the MOS in terms of sales revenue and a s
a percentage. Also calculate the current operating leverage factor (round to the nearest 2 decimal places) and use it to
determine the expected percentage change in operating income stemming from an expected change in sales volume.
8) Change name of worksheet to “Original Assumptions”.
9) Make sure you have cleaned up your worksheet using the formatting conventions listed above.
10) Go to the “Advising client” worksheet and follow the directions found there.
CVP Model
ASSUMPTIONS
Product #1:
Sales price per unit
Variable costs per unit:
Launch-it
Total variable cost per unit
Total variable cost per unit
Monthly volume
Fixed costs per month:
Total fixed costs per month
Target profit per month
Expected change in volume (%)
Launch-it
Target profit volume:
-in units
-in sales revenue
Monthly volume
Product #2:
Sales price per unit
Variable costs per unit:
Product #1
Unit CM
CM %
Breakeven point:
-in units
-in sales revenue
Treat-time
Product #2
Unit CM
CM %
Breakeven point:
-in units
-in sales revenue
Target profit volume:
-in units
-in sales revenue
Treat-time
CVP Model
Jake’s Pet Supplies
Pro Forma Contribution Margin Income Statement
For the month ending June 30
Product #1
Product #2
Total
Calculation of Weighted average CM per unit
Product #1
Product #2
Total
WACM %
WACM/unit
Multiproduct Breakeven point:
-in units
Sales revenue at breakeven
Product #1
Product #2
Total
Multiproduct Target profit point:
-in units
Sales revenue at target profit
Product #1
Product #2
Total
Margin of Safety (in $)
Margin of Safety %
Operating Leverage Factor
Expected % change in operating income (%)
EXCEL HINT: To copy an entire
of the screen and choose “Mov
have the copy, choose “rename
Once you have built the model, use it to answer Jake’s questions about his business. Treat
each situation as a separate scenario. All comparisons should be made to the original
assumptions.
1. Save a copy of your original model to a new spreadsheet called “supplier cost increase”.
Say the supplier is expected to increase the cost of the products by 20%. What is the new
operating income? What is the new WACM%? What is the new MOS%? Briefly explain
your findings to the client.
Operating income
WACM percentage
MOS%
2. Save a copy of your original model to a new spreadsheet called “new sales mix”. Say
the monthly sales volume is now expected to be 175 “Treat-times” and 125
“Launch-its” (same total units, but a different sales mix). What is the new operating
income? What is the new WACM/unit ? Given this sales mix, how many units (in total) will
Jake need to sell to earn his target profit? Briefly explain your findings to the client.
Operating income
3. Save a copy of your original model to a new spreadsheet called “alternative contract”.
Say Jake’s employee wanted to negotiate a different work contract: $1,500 per month plus
5% of revenue. Given his original sales volume and mix, how would this contract have
changed Jake’s operating income? What is the new operating leverage factor? What is the
new expected percentage change in operating income if volume increases as expected in
the future? Briefly explain your findings to the client.
Operating income
WACM/unit
Units to earn target profi
Operating leverage facto
Expected % change in op
EXCEL HINT: To copy an entire worksheet, right click on the worksheet tab at the bottom
of the screen and choose “Move or Copy”. Then check the “create a copy” box. Once you
have the copy, choose “rename”.
EXCEL HINT: To copy a cell from a different worksheet, pu
want the number to go, and then go back to the original wo
the cell, and then press enter.
NEW
Operating income
ORIGINAL
Change
Brief explanation:
WACM percentage
MOS%
Operating income
Brief explanation:
WACM/unit
Units to earn target profit
Operating income
Operating leverage factor
Expected % change in op inc
Brief explanation:
m a different worksheet, put a + in the cell where you
n go back to the original worksheet, put your cursor on
lanation:
lanation:
lanation:
CVP EXCEL MODEL GRADING RUBRIC
Original Assumption worksheet
Formatting conventions followed:
units
monetary amounts
percentages
right justified
POSSIBLE POINTS
5
5
5
5
ALL figures used formulas and cell references except in blue box
20
All figures are correct
10
Advising Client worksheet
Supplier cost increase (green boxes)
Correct comparison figures
Explanation (proper grammar, complete sentences, professional)
5
5
New Sales mix (yellow boxes)
Correct comparison figures
Explanation (proper grammar, complete sentences, professional)
5
5
Alternative contract (purple boxes)
Correct comparison figures
Explanation (proper grammar, complete sentences, professional)
5
5
Data on worksheet follows formatting conventions
5
Other 3 Worksheets
Other 3 worksheets properly labeled
All figures in the blue ‘ASSUMPTIONS’ boxes are correct
Total
5
10
100
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Formatting
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