Ucb Cvp Analysis Essay

1260 Words Dec 23rd, 2012 6 Pages
1.0 How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?

A. The income statement shown on page 33 exclusively shows the contribution margin. This format is used for internal company analysis. Benetton has chosen to show it as a part of annual report. The variable costs (Distribution and Transport costs, Sales commission) are clubbed together. This format is called the contribution format.
The income statement on page 50 shows the variable costs and fixed costs more clearly. It has broken down the
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Also, CM ratio = 696/ 1859 = 0.374
Hence, Break even point (2003) = 464/0.374 = 1240.64 (million Euros)
For 2004, Fixed expenses = 436 (in million €). Also, CM ratio = 653/ 1686 = 0.387
Hence, Break even point (2003) = 436/0.387 = 1126.61 (million Euros) 2003 2004
Fixed Costs(in million €) 464 436
CM Ratio 0.374 0.387
Break even point(in million €) 1240.64 1126.61

The numbers in 2003 and 2004 are different for the following reason:
1. Fixed costs in 2004 are lower that of 2003 and contribution margin ratio is higher in 2004 than that of 2003. Hence, the break even point is lower for 2004.
2. The reverse is the case in 2003.
4.0 What sales volume would have been necessary in 2004 for Benetton to attain a target income from operations of €300 million?

Sales required = (Fixed Costs + Target Profit) / CM ratio = (436+300)/0.387 = 1901.81 (in million €) 2004
Fixed Costs (in million €) 436
Target profit(in million €) 300
CM Ratio 0.387
Sales required(in million €) 1901.81

5.0 Compute Benetton’s margin of safety using data from 2003 and 2004. Why do your answers for the two years differ?
Margin of safety = Actual Sales – Breakeven sales In 2003,
Actual sales = 1859 (in million €) and Break even sales = 1240.64 (in million €) Hence, Margin Of Safety (2003) = 618.36 (in million €) In 2004, Actual sales = 1686 (in million €) and Break even sales = 1126.61(in million €) Hence,

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