The Annie Smith Dance Center
The Director of Annie Smith Dance Center is asking for assistance with the financial aspects of running a professional group of performers. She wants financial information presented in an easy to read format and a better understanding of the profitability of the concerts and the organization as a whole.
The Annie Smith professional group features three styles of dance concerts each year. Two of the dance concerts showcase a different genre. The third performance is a Christmas Spectacular, which is the most popular and is therefore scheduled every year. The table below provides information about expected ticket sales for the performances.
Lower Orchestra Section (A)Upper Orchestra Section (B)DescriptionsNo. of Seats.Ticket PriceTickets sold per performanceNo. of seatsTicket PriceTickets sold per performanceHipHop Performance150$85100%450$5090%Jazz and Tap Dance150$85100%450$5060%Christmas Spectacular150$125100%450$50100%
Ms. Smith has prepared a tentative schedule for the coming season. The table below also shows the type and number of performances and direct cost per type of concert.
DescriptionsNumber of PerformancesCost per Dance Concert
(direct fixed costs)*HipHop Concert10$48,000Jazz and Tap Dance586,000Christmas Spectacular2022,000Total Direct Fixed Costs$156,000
*Examples of direct fixed costs are costumes, rehearsals, royalties, guest artist fees, choreography, and salaries of production staff, music, and wardrobe for each of the concerts. This amount does not change with the number of performances.
Additional costs:
Variable costs associated with each performance are shown below.
Musicians$6,100Rental of auditorium2,500Dancers' compensation6,700
Annual general administrative and operating costs for the dance center are:
Administrative staff$185,000Insurance25,000Marketing115,000General office expenses90,000
Required:
Computations (use Excel)
TitleName of Dance ConcertRevenues/
PerformanceVariable Costs/
PerformanceContribution Margin/
PerformanceNumber of PerformancesTotal Contribution/
Type of Dance ConcertDirect Fixed CostsSegment Margin/
Type of Concert1.2.3.Total
Memo (use Word)
Write a 4 or 5paragraph memo to the owner of the dance center to assist her in interpreting the financial analysis. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word)
Start with an introduction and end with a summary or conclusion. Use headings.
Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
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Rubric Name: Case Grading Rubric for Quantitative Business Courses Timeliness v1

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Module 2 – Case
COST–VOLUME–PROFIT ANALYSIS
Assignment Overview
The Annie Smith Dance Center
The Director of Annie Smith Dance Center is asking for assistance with the financial aspects of running a professional group of performers. She wants financial information presented in an easy to read format and a better understanding of the profitability of the concerts and the organization as a whole.
The Annie Smith professional group features three styles of dance concerts each year. Two of the dance concerts showcase a different genre. The third performance is a Christmas Spectacular, which is the most popular and is therefore scheduled every year. The table below provides information about expected ticket sales for the performances.
Lower Orchestra Section (A) 
Upper Orchestra Section (B) 

Descriptions 
No. of Seats. 
Ticket Price 
Tickets sold per performance 
No. of seats 
Ticket Price 
Tickets sold per performance 
HipHop Performance 
150 
$85 
100% 
450 
$50 
90% 
Jazz and Tap Dance 
150 
$85 
100% 
450 
$50 
60% 
Christmas Spectacular 
150 
$125 
100% 
450 
$50 
100% 
Ms. Smith has prepared a tentative schedule for the coming season. The table below also shows the type and number of performances and direct cost per type of concert.
Descriptions 
Number of Performances 
Cost per Dance Concert (direct fixed costs)* 
HipHop Concert 
10 
$48,000 
Jazz and Tap Dance 
5 
86,000 
Christmas Spectacular 
20 
22,000 
Total Direct Fixed Costs 
$156,000 
*Examples of direct fixed costs are costumes, rehearsals, royalties, guest artist fees, choreography, and salaries of production staff, music, and wardrobe for each of the concerts. This amount does not change with the number of performances.
Additional costs:
Variable costs associated with each performance are shown below.
Musicians 
$6,100 
Rental of auditorium 
2,500 
Dancers' compensation 
6,700 
Annual general administrative and operating costs for the dance center are:
Administrative staff 
$185,000 
Insurance 
25,000 
Marketing 
115,000 
General office expenses 
90,000 
Case Assignment
Required:
Computations (use Excel)
· Summarize key financial information in a table as shown below.
Title 

Name of Dance Concert 
Revenues/ Performance 
Variable Costs/ Performance 
Contribution Margin/ Performance 
Number of Performances 
Total Contribution/ Type of Dance Concert 
Direct Fixed Costs 
Segment Margin/ Type of Concert 
1. 

2. 

3. 

Total 
· Use the information in the table you completed to compute the number of performances required to break even for each concert. Do not include general and administrative expenses. These are separate computations for each dance concert.
· Compute break even for the organization as a whole (include all fixed expenses) and express the result in revenues instead of the number of performances.
· Ms. Smith wants the Dance Center to generate at least $200,000 in operating profit. What level of revenues does the performance group need to achieve to meet this goal? Prepare an income statement in good format to support the computations.
· Give a recommendation about changes Ms. Smith can implement to achieve the target profit. Support your idea with computations.
Memo (use Word)
Write a 4 or 5paragraph memo to the owner of the dance center to assist her in interpreting the financial analysis. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.
Short Essay (use Word)
Start with an introduction and end with a summary or conclusion. Use headings.
· What are some shortcomings of multiproduct even analysis?
· How does demand and resource constraints affect this type of analysis.
Assignment Expectations
Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.
Modular Learning Outcomes
Upon successful completion of this module, the student will be able to satisfy the following outcomes:
· Case
Apply breakeven analysis to a business scenario.
· SLP
Identify special pricing issues.
Costvolumeprofit (CVP) analysis helps managers understand the interrelationships among cost, volume, and profit by focusing their attention on the interactions among the prices of products, volume of activity, perunit variable costs, total fixed costs, and mix of products sold. It is a vital tool used in many business decisions such as deciding what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of production facilities to acquire.
The variable costing income statement is helpful to managers in judging the impact on profits of changes in selling price, cost, or volume.
Sales, variable expenses, and contribution margin can also be expressed on a perunit basis or as a percentage.
Contribution margin ratio (CM ratio)
The CM ratio is calculated by dividing the total contribution margin by total sales.
The CM ratio can also be calculated by dividing the contribution margin per unit by the selling price per unit.
Breakeven analysis
The breakeven point can be computed using either the equation method or the contribution margin method.
The equation method is based on the contribution approach income statement.
The equation can be stated in one of two ways:
Profits = (Sales – Variable expenses) – Fixed Expenses
or
Sales = Variable expenses + Fixed expenses + Profits
The contribution margin method has two key equations:
Breakeven point in units sold = Fixed expenses divided by CM per unit
Breakeven point in sales dollars = Fixed expenses divided by CM ratio
The margin of safety
The margin of safety is the excess of budgeted (or actual) sales over the breakeven volume of sales.
Cost structure refers to the relative proportion of fixed and variable costs in an organization. Managers often have some latitude in determining their organization's cost structure.
There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.
An advantage of a high fixed cost structure is that income will be higher in good years compared to companies with a lower proportion of fixed costs.
A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with a lower proportion of fixed costs.
Companies with low fixed cost structures enjoy greater stability in income across good and bad years.
Operating leverage
Operating leverage is a measure of how sensitive net operating income is to percentage changes in sales.
The degree of operating leverage is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits. It is computed as follows:
Degree of operating leverage = Contribution margin divided by net operating income
The degree of operating leverage is not a constant—like unit variable cost or unit contribution margin—that a manager can apply with confidence in a variety of situations. The degree of operating leverage depends on the level of sales and must be recomputed each time the sales level changes. Also, note that operating leverage is greatest at sales levels near the breakeven point and it decreases as sales and profits rise.
Module 2 – Background
COSTVOLUMEPROFIT ANALYSIS
Modular Learning Objectives
Keep the following objectives in mind as you work through the material in this module:
· Define of costvolumeprofit.
· Understand the relationship between variable costing and costvolumeprofit analysis.
· Apply and analyze breakeven.
· Compute breakeven in units.
· Compute breakeven in sales.
· Analyze target profit.
Required Reading
Variable and fixed costs were introduced in the prior module. Now it is time to examine cost behavior in more detail by familiarizing yourself with the following while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.
Costvolumeprofit (CVP) analysis
Companies use costvolumeprofit (CVP) analysis (also called breakeven analysis) to determine what affects changes in their selling prices, costs, and/or volume will have on profits in the short run. A careful and accurate costvolumeprofit (CVP) analysis requires knowledge of costs and their fixed or variable behavior as volume changes.
A costvolumeprofit chart is a graph that shows the relationships among sales, costs, volume, and profit. Look at illustration below. The illustration shows a costvolumeprofit chart for Video Productions, a company that produces DVDs. Each DVD sells for $20. The variable cost per DVD is $12, and the fixed costs per month are $ 40,000.
CostVolumeProfit Chart
The total cost line represents the fixed costs of $40,000 plus $12 per unit. Thus, if Video Productions produces and sells 6,000 DVDs, the company’s total costs are $112,000, made up of $40,000 fixed costs and $ 72,000 total variable costs ($ 72,000 = $ 12 per unit X 6,000 units produced and sold).
The total revenue line shows how revenues increase as volume increases. Total revenue is $ 120,000 for sales of 6,000 tapes ($20 per unit X 6,000 units sold). In the chart, we demonstrate the effect of volume on revenue, costs, and net income, for a particular price, variable cost per unit, and fixed cost per period.
At each volume, one can estimate the company’s profit or loss. For example, at a volume of 6,000 units, the profit is $8,000. We can find the net income either by constructing an income statement or using the profit equation. The contribution margin income statement gives the following results for a volume of 6,000 units:
Video Productions 

Contribution Margin Income Statement 

Revenue 
$120,000 
Less: variable costs 
72,000 
Contribution margin 
$ 48,000 
Less: Fixed costs 
40,000 
Net income 
$ 8,000 
The contribution margin is the amount by which revenue exceeds the variable costs of producing that revenue. We can calculate it on a per unit or total sales volume basis. On a per unit basis, the contribution margin for Video Productions is $8 (the selling price of $20 minus the variable cost per unit of $ 12).
Contribution Margin = Sales – Variable Cost
The contribution margin indicates the amount of money remaining after the company covers its variable costs. This remainder contributes to the coverage of fixed costs and to net income. In Video Production’s income statement, the $ 48,000 contribution margin covers the $ 40,000 fixed costs and leaves $ 8,000 in net income.
You can also calculate a contribution margin ratio by using the following formula:
Contribution Margin RATIO = Sales – Variable Cost
Profit equation The profit equation is just like the income statement, except it presents the analysis in a slightly different form. According to the profit equation:
Net income = Revenue – Total variable costs – Fixed costs
For Video Productions, the profit equation looks like this:
Net income = $ 120,000 − $ 72,000 − $ 40,000
Net income = $ 8,000
The CVP chart above shows cost data for Video Productions in a relevant range of output from 500 to 10,000 units. Recall the relevant range is the range of production or sales volume over which the basic cost behavior assumptions hold true. For volumes outside these ranges, costs behave differently and alter the assumed relationships. For example, if Video Productions produced and sold more than 10,000 units per month, it might be necessary to increase plant capacity (thus incurring additional fixed costs) or to work extra shifts (thus incurring overtime charges and other inefficiencies). In either case, the assumed cost relationships would no longer be valid.
The following video reviews the contribution margin (variable costing) income statement and its components to prepare for the computation of breakeven.
A company breaks even for a given period when sales revenue and costs charged to that period are equal. Thus, the breakeven point is that level of operations at which a company realizes no net income or loss.
A company may express a breakeven point in dollars of sales revenue or number of units produced or sold. No matter how a company expresses its breakeven point, it is still the point of zero income or loss. To illustrate the calculation of a breakeven point, watch the following video. https://www.youtube.com/watch?time_continue=9&v=94lrvPlG9P4
Let us compute breakeven for Video Productions.
Fixed costs = $40,000
Contribution margin per unit = $20 selling price less $12 variable expenses = $8
Breakeven in units: $40,000 / 8 = 5,000 units
Breakeven in sales: $40,000 / ($8/$20) = $100,000
Let us test the above computations by creating a contribution margin income statement. The revised income statement below shows that Video Productions break even at $100,000 in sales. Another way to define breakeven is to say it is the point where the total contribution margin equals fixed costs.
Video Productions 

Contribution Margin Income Statement 

Revenue 
$100,000 
Less: variable costs 
60,000 
Contribution margin 
$40,000 
Less: Fixed costs 
40,000 
Net income 
0 
Margin of safety = Current sales – Break even sales
Margin of safety = $ 120,000 – $ 100,000 = $ 20,000
Sometimes people express the margin of safety as a percentage, called the margin of safety rate or just margin of safety percentage. The margin of safety rate is equal to
(current sales breakeven sales) / current sales.
Using the data just presented, we compute the margin of safety rate is $20,000 / 120,000 = 16.67 %
This means that sales volume could drop by 16.67 percent before the company would incur a loss.
Although you are likely to use costvolumeprofit analysis for a single product, you will more frequently use it in multiproduct situations. The easiest way to use costvolumeprofit analysis for a multiproduct company is to use dollars of sales as the volume measure. For CVP purposes, a multi product company must assume a given product mix. Product mix refers to the proportion of the company's total sales attributable to each type of product sold.
What about starting a coffee shop? The video highlights the use of breakeven for such an endeavor. https://www.youtube.com/watch?v=i7uhmGVsbUg
You can also use this same type of analysis to determine how many sales units or sales dollars you would need to make a specific profit (very helpful!). The good news is you have already learned the basic formula, we are just changing it slightly. The formulas we will need are:
Units at Target Profit =
(Fixed Costs + Target Income)/Contribution Margin per unit
Sales Dollars for Target Profit =
(Fixed Costs + Target Income)/Contribution Margin RATIO
These look familiar (or they should!). These are the same formulas we used for breakeven analysis but this time we have added target income. If you think about it, it is the same formula because at breakeven our target income is zero. https://www.youtube.com/watch?time_continue=7&v=4U60Ya5ysMU
Let’s look at another example. The management of a major airline wishes to know how many seats must be sold on Flight 529 to make $8,000 in profit. To solve this problem, management must identify and separate costs into fixed and variable categories. The fixed costs of Flight 529 are the same regardless of the number of seats filled. Fixed costs include the fuel required to fly the plane and crew (with no passengers) to its destination; depreciation on the plane used on the flight; and salaries of required crewmembers, gate attendants, and maintenance and refueling personnel. Fixed costs are $12,000.
The variable costs vary directly with the number of passengers. Variable costs include snacks and beverages provided to passengers, baggage handling costs, and the cost of the additional fuel required to fly the plane with passengers to its destination. Management would express each variable cost on a per passenger basis. Variable costs are $25 per passenger.
Tickets are sold for $125 each. The contribution margin is $100 ($125 sales – $25 variable) and the contribution margin ratio is 80% ($100 contribution margin /$125 sales). We can calculate the units and sales dollar required to make $8,000 in profit by:
Units at Target Profit =
Fixed Costs + Target Income = 12,000 + 8,000 = $20,000 = 200 tickets
The sales dollars required could be calculated as break even units of 200 tickets x $125 sales price per ticket = $25,000 or by using the following formula:
Sales Dollars for Target Profit =
(Fixed Costs + Target Income) / Contribution Margin RATIO
or $20,000 / .8 = $25,000
Management can also use its knowledge of costvolumeprofit relationships to determine whether to increase sales promotion costs in an effort to increase sales volume or to accept an order at a lowerthanusual price. In general, the careful study of cost behavior helps management plan future courses of action.
Check Your Understanding

Click on the quiz icon for an ungraded, 20question trueorfalse selfstudy quiz to check your progress. If you are not satisfied with the score, review some of the material again. For more indepth information, review materials listed under optional reading at the bottom of this page. 
Final Thoughts CostVolumeProfit (CVP) analysis is a computational method that analyzes the effect of sales and product costs on the operating income of a business. Specifically, it assesses the effect of changes in variable costs, fixed costs and selling price on operating income. Breakeven analysis (with or without a target profit) is a common CVP approach. Another definition of breakeven is where the total contribution margin equals total costs. A contribution margin income statement shows zero income at breakeven. Several assumptions underlie CVP analysis: · All cost can be categorized as variable or fixed. · Sales price per unit, variable cost per unit, and total fixed cost are constant. · Mixed costs must be split into their fixed and variable component by an estimation process. · Understanding the behavior of costs makes costvolumeprofit analysis possible. 
Optional Reading
For further detail refer to Dr. Walther’s accounting text and videos.

Walther, L. (2017). Chapter 18: CostVolumeProfit and Business Scalability . 
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