Management accounting P&L
Thank
you for the management accounting schedule that you sent over to me, together
with the operating leverage calculation. I must admit I am struggling to understand
what this new P&L tells me that the draft accounts you sent last week do
not. After all the top line revenue and bottom-line profit are the same! So, I
do have a couple of questions that I have listed below. Perhaps you could
respond to them…
1.
I’ve read up a bit on operating
leverage, and I understand that it’s got something to do with risk, and in
particular how my profit is impacted by changes in volume. Could you explain
exactly what the ratio is telling me please, and perhaps demonstrate what will
happen to my profit if sales volumes, say, increase by 4% and decrease by 4%.
2. I
have also been reading about break-even point and margin of safety
calculations. They sound very useful! Can you calculate these for me based on
last year’s data and comment upon them? If we need to achieve a profit of
£30,000 in the coming year, how many unites we need to sell?
3. One
of the advantages of variable costing and contribution approach is that the
date can be used for the cost volume profit analysis. Can you provide two other benefits of variable costing
and contribution approach?
Finally, I was talking to my friend Martin about pricing policy. He suggested that cost plus pricing is a good way of guaranteeing that all your costs are covered, and you are making a profit. I must admit that all I have done with my prices is to mirror the ones that my competitors charge. Apparently a ‘mark-up’ of 70% on cost of sales is the average for this industry (seems high to me!). If I switched to1. cost plus pricing and used the average industry mark up, I wonder if you could let me know how this might impact my profits overall?
USA 
India