Management decision-making

Cost-volume-profit (CVP) analysis allows managers to see how changes  in costs and volume will affect the company’s operating expenses and net  income (for-profit) or net assets (non-profit). This form of analysis  compares different relationships, such as the cost of operating and  producing goods and services, the volume of goods and services sold, and  the profits generated from the sale of those goods and services  (Gapenski, 2012). Cost-volume-profit (CVP) analysis helps managers make  rational decisions such as what products and services to offer, what  prices to charge, what marketing strategy to use, and what cost  structure to maintain. Its primary purpose is to estimate how profits  are affected by the following five factors: selling prices, sales  volume, unit variable costs, and total fixed costs. The CVP analysis is  also extremely helpful in determining the contribution margin (CM),  which is the per-unit revenue from the sale of goods and services minus  the per-unit variable costs (VC) associated with producing the goods or  delivering the services, with the product being the amount remaining to  cover the fixed costs (FC) and ultimately flows into the profits. We, as  industry leaders, need to understand those variables that impact profit  maximization, and then make changes, as necessary, to improve our  firm’s financial position. The CVP model is one example of managerial  accounting approach intended to aid managers in making smart financial  and operational decisions.

Sources:

Gapenski, L. C. (2012). Healthcare finance: An introduction to accounting and financial management. (5th ed.). Chicago, IL: Health Administration Press

Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.).   Columbus, OH: McGraw-Hill Education.

Unit Learning Outcomes

ULO 5. Utilize cost volume profit (CVP) analysis to aid in management decision-making. (CLO 2, 3, 4, and 7)

Directions

Initial Posting

Greenleaf Book Group is a book publishing company in Austin, Texas,  that attracts authors who are willing to pay publishing costs and forgo  up-front advances in exchange for a larger royalty rate on each book  sold. For example, assume a typical publisher prints 10,000 copies of a  new book that it sells for $12.50 per unit. The publisher pays the  author an advance of $20,000 to write the book and then incurs $60,000  of expenses to market, print, and edit the book. The publisher also pays  the author a 20% royalty (or $2.50 per unit) on each book sold above  8,000 units. In this scenario, the publisher must sell 6,400 books to  break even ($80,000 in fixed costs ÷ $12.50 per unit). If all 10,000  copies are sold, the author earns $25,000 ($20,000 advance + 2,000  copies × $2.50) and the publisher earns $40,000 ($125,000 − $60,000 −  $20,000 − $5,000). Greenleaf alters the financial arrangement described  above by requiring the author to assume the risk of poor sales. It pays  the author a 70% royalty on all units sold (or $8.75 per unit), but the  author forgoes the $20,000 advance and pays Greenleaf $60,000 to market,  print, and edit the book. If the book flops, the author fails to  recover her production costs. If all 10,000 units are sold, the author  earns $27,500 ( $10,000 units × $8.75 − $60,000) and Greenleaf earns  $37,500 ( = 10,000 units × ($12.50 − $8.75)). Source: Christopher  Steiner, “Book It,” Forbes, September 7, 2009, p. 58

The Greenleaf Publishing Company currently pays the author a 20%  royalty on all units sold, but the author forgoes advances and pays  Greenleaf to market, print, and edit the book. This is a bit different  from the traditional payment method of Greenleaf’s competitors. They  tend to employ a more traditional approach to compensating their authors  in that they provide an advance to write the book, and then incur the  expenses to market, print, and edit the manuscript. The publisher also  pays the author a royalty on each unit sold above a certain threshold.  Management has noticed a decline in the number of authors seeking to  publish with the Greenleaf. The CEO has formed a special taskforce to  investigate the loss in volume and formulate a plan of action to  positively change the trajectory of the company. You are a member of the  committee. An analysis  has been performed using cost, price, and quantity data for both the  traditional and non-traditional approach used by Greenleaf. Using the  results from the analyses  and additional information you deem to be relevant to this scenario,  prepare a recommendation on what actions you believe the company should  consider taking to reverse the current trends and maximize the firm’s  potential for long-term success. Your  recommendation should contain sound arguments that are well supported,  properly vetted, and logically presented. It is important that  management carefully consider any potential ethical implications  associated with their stated position. If there are any potential  ethical concerns associated with your position, they should be  identified and discussed in the final recommendation. In order to  formulate your recommendation, you may want to carefully consider the  problem, the three (3) CVP assumptions, collect relevant data and  information, critically evaluate the alternatives, and document your  recommendations using sound arguments that are well supported, properly  vetted, and logically presented.

If you prepared your response in Word, please cut and paste it  directly into the discussion board so that everyone will not need to  first download your response, then open it to read it. There is no  minimum or maximum in terms of the word count; however, the response  should explicitly address all required components of this discussion  assignment. The document should be prepared consistent with the APA  writing style (6th edition) and reflect higher level cognitive  processing (analysis, synthesis, and or evaluation).

Peer Responses

It is important that you become comfortable receiving and giving  constructive criticisms, since this is an important component in one’s  professional growth and development and a core competency for leaders.  Students will be expected to read the initial posting of at least TWO  peers, and then provide thoughtful comments addressing the following:

1. a) Point out what you perceived to be the strengths of the initial posting along with supporting rationale.

   b)  Identify specific opportunities for improvement with regard to the  content in the initial posting. Furthermore, you should provide  supporting rationale for your stated position, as well as concrete  suggestions and guidance intended to strengthen the effectiveness of the  content.

Peer responses should be typed directly into the discussion thread  and not attached to a posting. For these responses, should outside  sources be used to support the content within the postings, proper  in-text citations and correctly formatted references should be prepared  consistent with the APA (6th edition). The list of references should be  physically positioned at the end of the postings.

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