116 Understanding the Numbers
sales revenue target to meet your profitability goal will drop only a small
amount—from about $1.130 million ($340,000/30.1%) to $1.120 million
($340,000/30.5%). Basically, we would have to sell only 9,830 books with 41%
at discount. This would mean, though, that we would have to sell substantially
more packages. All in all, our answer is not that sensitive to the mix.”
Abbey now asked Stephen if he wanted to partner with her.
METHODS OF COST BEHAVIOR ESTIMATION
CVP analysis is a rough, first-pass analytic technique. Businesspeople use it to
make some initial profitability estimates of potential opportunities and to cull
those that show the most promise. More in-depth analysis would then follow.^6
The key to CVP analysis is correctly identifying the cost structure of the
business opportunity being analyzed. Without a proper knowledge of the cost
behaviors—identification of the fixed period costs and the variable costs per
unit or as a percentage of sales revenue—business planning cannot be done
properly. There are four methods used to analyze cost behavior. Three are ana-
lytic approaches that require historical data, and the other is more judgmental.
Abbey’s Web-site example discussed above is an example of the latter.
Since the business was not yet operating, there was no database to study.
Rather, the cost structure was estimated by analyzing the processes on which
Abbey’s business would be based. The data came from discussions with process
partners such as the Web-site designer and the logistics company and from
Abbey’s firsthand knowledge of the book business. This procedure depends on
correctly identifying all the necessary business processes and the experience
EXHIBIT 3.11 Mix sensitivity analysis optimistic mix.
Books Packages Hats Mix
Per Unit Total Per Unit Total Per Unit Total TotalExpected mix 100 70 30
Revenue $80 $ 8,000 $140 $ 9,800 $50 $ 1,500 $ 19,300
Per c ent age of
total 41.45% 50.78% 7.77% 100.00%
CVP target $1,115,986
Mix % allocation $462,585 $566,667 $86,735 $1,115,986
Variable cost 71.3% 329,592 71.4% 404,762 48.0% 41,633
Contr ibution
margin $132,993 $161,905 $45,102 $ 340,000
Divide by unit
price to find
unit sales
needed Books 5,782 Packages 4,048 Hats 1,735