Business Units in Anthony's Orchard: Cost-Volume-Profit Analysis - Paper Example

Effective integration is critical to business success. According to Jiang (2009), the main functional units do not work in isolation but function together to strengthen the whole organization. The integration of marketing, finance, production, Human resources is vital in moving the company's mission from theory to practice, not merely in the daily operations but the long-term financial performance. Furthermore, Jiang (2009) noted that these units "are all integrated and are responsible for working together so as to realize the overall objectives of the organization." The rich legacy of Anthony's Orchard as demonstrated in their treasured corporate culture is a testament of their internal integration that is expressed in the external business environment.

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CPV Analysis of the Current Years Financials

Cost-volume-profit analysis is essential to establish the effects of varying cost and volume on Anthony's Orchard operating and net income. For a CVP analysis to be fully effective and efficient the following assumptions need to be made:

1. There are two ways that all the cost of an organization needs to be organized or categorized: variable or fixed.

2. Three financial aspects are assumed to be constant: sales price per unit, total fixed cost and variable cost per unit.

3. All units that are produced by the organization end up being sold.

This analysis entails the following: transfer pricing, direct material costs, income statement, cash flow, sales and the cost of goods sold (COGS) for the current fiscal year of the company.

Transfer pricing

Transfer pricing involves the price that is charged between the various interrelated entities within the organization. The transfer policy of Anthonys Orchards like any other company significantly affects it income after tax. The transfer prices have no net effect on the overall profitability of Anthonys Orchard. However, the correct balance between the various operation units must be maintained to enable manageable costs of operation for each of the departments.

Direct material cost

The direct material cost has a direct effect on the profitability of the company and must be set at the companys best operation maximum. A higher cost of the operation material results into a direct increase in the CVP analysis by increasing the fixed costs hence minimizing the net profit

Direct labor

Direct labor represents the category of variable costs in the CPV analysis. The high costs of labor especially in this labor intensive industry have made the labor and resulting variable costs rise. However, Anthonys Orchard can maintain it a manageable level to help in maximizing the profits.

Sales

Cost of goods sold (COGS)

The role of CVP analysis of these three entities is to determine the relationship that exists between the revenue, fixed costs and the variable costs at the various production level at Anthonys Orchard. From this analysis the effects of changes in the sales prices, the volumes, and product mix are determined. The breakeven formula below is used for the calculation of the various entities related to CVP;

P=S-FC-VC and S=XY, where P is the profit and is usually zero at the breakeven point; S is the sales; FC is the fixed cost; VC, the variable cost; X, some goods sold; and Y, the price per unit sold.

The breakeven point reflects the point at which the level of sales where the total amount of revenues that have been generated equals the total cost of the goods.

The CPV analysis can be used to determine the health status of Anthonys Orchard using the profitability obtained from the formulae above.

The sales =11, 055, 208, FC= 8,017,892, VC=908010; using the formula, profit is obtained as below;

P=11,055,208-8,017,892-908,010

This gives US $ 2,129,306

This value is a relatively ample amount that can cater for other operations of Anthonys Orchard.

What if Analysis

CEO Frost confessed that as a part of their strategic management they must "continually monitor conditions and consider them when developing and executing strategic plans." This sort of strategic assessment is the nurse of effective management. It is also an indication that the management of Anthony's Orchard is proactive and therefore, in a good position to predict and respond appropriately to any fallout.

The potential fallout of such a major client will affect the company's bottom line, but their prudent fiscal management will help them to bounce back within reasonable time. However, in safeguarding the future of their company, the expansion into new product lines is a wise move but also the management must consider global sourcing and outsourcing of production with the aim of reducing cost.

The company will not be able to meet their revenue goal of $25 million since it has plans to expand its product line thus will be forced to spend in the purchase in apple press which is an equipment that would be used in the production of the apple juice.

The company is planning to purchase the apple presser by $950,000 which will cut down the revenue target by a 3.8% which clearly shows that the target will not be able to be met. On the other hand, the returns that the company will get upon the expansion of their product line through introducing the apple juice are about $95,000 per year which shows that the amount is very small. The amount would only add a percentage of about 0.038% to the total revenue making the amount very insignificant.

The information above shows clearly that the company should not invest in the business of expanding the product line as it would add very little to the revenue accumulation the company is targeting.

The draft showing the financial flow of the company is as shown below:

Prepared Pick Events Total

Net revenue 8749250 3248700 2499695 14497645

Less: Cost of goods sold -5909619 -1909575 -1287708 -9106902

Gross margin 2839631 1339125 1211987 5390743

32.5% 41.2% 48.5% 37.18%

References

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