Basic CVP Analysis – Using Goal Seek Determine the breakeven point for the Drill/Driver product line. Pittsburgh Tools is considering modifications to the 18v Light production line. Analysis suggests that the modifications could result in $0.65 per unit variable cost reduction and $1,300 per quarter fixed cost increase. Assuming these changes have no impact on volume, determine the price that would be necessary to achieve $0 product line margin?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Each of the question below is to be treated independently.
Basic CVP Analysis – Using Goal Seek
- Determine the breakeven point for the Drill/Driver product line.
- Pittsburgh Tools is considering modifications to the 18v Light production line. Analysis suggests that the modifications could result in $0.65 per unit variable cost reduction and $1,300 per quarter fixed cost increase. Assuming these changes have no impact on volume, determine the price that would be necessary to achieve $0 product line margin?
Multiproduct CVP Analysis – Using Solver
- Assuming the current sales mix reaches the targeted sales mix, determine the breakeven point in sales revenue necessary for the division to achieve $0 divisional operating income (breakeven).
- Assume the current sales mix reaches the targeted sales mix, determine the sales revenue necessary for the division to achieve $100,000 divisional operating income.
See the Excel instructions on the next page
- Making Copies of a Worksheet Tab
- Your completed Excel file will have 5 worksheet tabs (the original Quarter Budget and one additional worksheet tab for each of the 4 questions above)
- Right-click on the worksheet tab name > Move or Copy… > (move to end) > Create a copy > OK
- Finding and Using Goal Seek
- Find the Data tab: Data >
Forecast Group > What-if Analysis > Goal Seek- Select the target cell, specify the target value, select the cell allowed to change, select OK
- Activating Solver
- File > Options > Add-ins > Manage: Excel Add-ins > Go
- Select Solver Add-in > OK
- The Solver tool will appear on the Data ribbon in the Analyze group
- Using Solver
- Data ribbon > Analyze group > Solver
- Set objective: select the target cell (divisional operating income is I12)
- To Value of: specify the target value
- By Changing Variable Cells: select individual cells allowed to change separated by a comma “,” (D5,F5,H5)
- Subject to the Constraints:
- Add > Cell Reference and Constraint (D14 = D15 and F14 = F15, and I14 = I15)
- Note that this specifies the sales mix for two of the three product lines and the total sales mix. This will allow the Solver tool a small amount of flexibility to achieve a valid mathematical result.
- Solve
- Add > Cell Reference and Constraint (D14 = D15 and F14 = F15, and I14 = I15)
- Data ribbon > Analyze group > Solver
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When i do solver for Q3, I am not getting same answer as you. I am getting Divisional operating income -0.08. 18vDrill - $3802, 18 ircular $2737, 18v light - $4596
Why is that? What am I doing wrong?
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