Ucb Cvp Analysis

1241 words 5 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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This figure exceeds the decrease in break even sales from 2003 to 2204 of 114 ((in million €)
6.0 Operating Leverage for 2004

Operating Leverage = Contribution Margin / Income from operations
Hence, Operating Leverage = 653/217 = 3 This means an x% increase in sales will make the profit increase by 3x% A 6% increase in sales will increase the income by “operating leverage” times - which is 18% 2004
Income from operations (in million €) 217
Percentage increase 1.18
Projected income from operations (in million €) 256.06

7.0 What income from operations would Benetton have earned in 2004 if it had invested 10 million additional euros in advertising and promotions and realized a 3% increase in sales? As an alternative, what income from operations would Benetton have earned if it not only invested 10 million additional euros in advertising and promotions but also raised its sales commission rate to 6% of sales, thereby generating a 5% increase in sales? Which of these two scenarios would have been preferable for Benetton?

1) A 3% increase in sales and 10 million euros increase in fixed expenses:
The CM ratio is 0.387. It remains constant because there is no change in the variable costs.

2004
Actual Sales (in million €) 1686
Sales

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