One of the most basic planning tools available to the managers is the ‘Cost-volume-profit’ analysis. ‘Cost-volume-profit’(CVP) analysis examines the behavior of total revenues, total costs, and operating income as changes occur in the output level, selling price, variable cost per unit, or fixed costs. CVP analysis is most commonly used by the managers as a help to answer them such questions as to the effect of sale of additional units on the revenue and the cost; the effect on the earnings of the company if the selling price is raised or reduced. By examining the various possibilities and alternatives, CVP analysis illustrates various decision outcomes and thus serves as an invaluable aid in the planning process (Horngren et al., 2002).

There are several assumptions in making a cost-volume-profit analysis. Some of the assumptions are:

• Changes in the total revenues and costs are caused only by changes in the number of product or service unit produced and sold.
• It is possible to segregate the total costs into fixed and variable components, where the variable component changes in line with changes in the level of output.
• The total revenues and total costs must have linearity in relation to output units within the relevant period, when the revenues and costs are plotted in a graph.
• The variables such as unit selling price, unit variable costs and fixed costs are explicit and they remain constant over a specific period.
• One of the important assumptions of CVP analysis is that the analysis assumes the sale of a single product or the sales mix (in the case of multiple products) remains unchanged even when the total sales level change.
• The other assumption is that it is possible to compare all revenues and costs without considering time value of money.

Most of these assumptions can very well fit into the cost structure of Caribbean Internet café, and hence the cost-volume-profit analysis can be adopted to decide on the expansion of the business of the firm.

The company is able to differentiate the variable costs by clearly establishing the relationship of some of the expenses to the usage of the cafe in terms of computer hours. For instance, the costs of food and drinks, representing costs that varies directly with the usage of the café by the customers.

This technique is used to determine the change in profit due to changes in volumes, costs and prices. Several approaches are applied even though all of them integrate at one point. One of the approaches is the graph method where the total costs and total revenues are plotted to form two different lines. For making the CVP analysis for Caribbean Internet café, this report will use a CVP graph instead of adopting a calculation method. As a first step, the total costs need to be segregated into fixed costs and the variable costs.

The employees are going to be 12 in number given that per the 90 hours that are going to be worked during the week, there are two people on duty. This implies that there are going to be a total of 180 hours that need to be covered. The charge per hour is 40 and the employees work in shifts of 15 hours per week. If the 180 hours are divided by the number of hours worked by each employee then multiplied by the hourly rate, the answer is then multiplied by the number of weeks in a month, which are four. Then to get the whole year’s amount it is multiplied by 12.

 

1. Define the fixed and one time fixed start up costs in this case. (2 Marks)

2. What will be the cost for the very first customer, or the cost per customer/per visit)? (1 mark)

3. What is the contribution margin per customer (hint: figure out the revenue per customer first)? (1 mark)

4. How many customer visits will CIC need in order for the cafe to break even in the first year? Should he proceed with this business? (1 mark)

Answer rating: 100% (QA)

1 The fixed costs are 1750 and the onetime fixed startup costs ... View the full answer