Discussion question Managerial Accounting

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)

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.

 

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