Cost-Volume -Profit Analysis 117and ability of those who provide accurate process cost estimates. Since
Abbey’s business model was relatively simple and many of the processes were
outsourced to experienced third-party providers, the resulting cost structure
estimates are probably relatively accurate. Given a more complex business op-
portunity that might require many internal process steps that are not yet well
understood, this methodology might not yield such accurate results.
The three analytic approaches are techniques used when historical data is
available. Unfortunately, many firms first develop this analysis af terthey have
begun operations—an inopportune time. For instance, now that the bloom is
off the Internet rose, there are many such firms scrambling to do this analysis
after the fact. Investors are withholding later-round financing until these firms
can develop the analysis we illustrated above.
Assume that Books “R” Us is one of those firms. Since it has not yet bro-
ken even, its investors want to better understand the cost structure and when,
if ever, they can expect a return. The company has been in business for two
years and over the past 12 months has shifted from building infrastructure to
its primary focus, selling books.^7 All agree that these past 12 months would be
a good basis on which to develop the analysis.^8 The relevant data are given in
Exhibit 3.12.
There are many ways to analyze this data. They all assume the following
first-order cost equation:
The first of the three databased techniques is simply to plot the data in an x-y
coordinate system with costs on the y-axis and sales revenues on the x-axis. It
Total Cost Variable Cost Fixed Cost
(Variable Cost Percentage Sales Revenue) Fixed Cost=+
=×+EXHIBIT 3.12 Books “R” Us data.
Revenue Total Costs Profit
$(000) $(000) $(000)
January $ 12,250 $ 13,500 $ (1,250)
February 14,500 16,000 (1,500)
March 15,000 16,500 (1,500)
April 16,250 17,250 (1,000)
May 15,250 16,500 (1,250)
June 13,750 15,500 (1,750)
July 11,500 13,000 (1,500)
August 17,500 18,250 (750)
September 23,750 25,000 (1,250)
October 15,500 16,500 (1,000)
November 16,000 17,250 (1,250)
December 22,500 22,000 500
Total $193,750 $207,250 $(13,500)