Question

Backyard Bulldog Barbecue Sauces, Inc., founded by Jefe Allen, produces a variety of barbecue sauces for use in outdoor grilling. Jefe is having difficulty understanding the relationship between different types of costs, revenue and profit.

Jefe has asked you to clarify this issue for him by answering the following questions.

1. Define the different types of costs that Backyard Bulldog Barbecue Sauces, Inc. will incur along with several examples of each.

2. How could overly optimistic sales estimates potentially harm Jefe's business?

3. Explain how cost-volume-profit analysis can help Jefe make good managerial decisions regarding Backyard Bulldog Barbecue Sauces, Inc.?

Answer 1

1.

Manufacturing costs - Cost of all resources consummed in process of manufacturing a product.

Administrative costs - Expenses an organisation incurred not directly linked to manufacturing and selling.

Selling and distribution costs - expenses incured by sales department in marketing and distrubuting the product.

Variable Costs - Cost that varies with level of output

• Manufacturing costs.. example - Materials.
• Administrative costs.  example - office supplies.
• Selling and distribution costs. example - Sales commission.

Fixed Costs - cost that remains constant irrespective of output level

• Manufacturing costs.. example - Equipment Depreciation
• Administrative costs.  example - Rent
• Selling and distribution costs. example - sales salaries

2.
An overly optimistic sales estimates could result finalcial problems.

a) When sales volume increases, fixed cost per units reduces and as a result total cost per unit also reduces.
So, there is possiblity of wrong(reduced) pricing of sales per unit.
If sales target not achieved then it will reduce the total revenue.
As a result,The company might not able to recover its fixed cost and end up in making losses.

b) Unsold inventories are stored as closing inventroy. That means, costs of those inventories won't be recovered.
High volume inventory also increases inventory carrying cost. And
There are possibilities of inventory losses as well.
As a result, the company could face financial losses.

3.

cost-volume-profit analysis or CVP analysis is based on three elements - Cost, volume and profit.
It gives insight into the profitabily of product.
It divides the costs in two category, variabe cost and fixed cost. And
Determines contribution, break even point of cost and volume which is helpful in managerial decision making such as
estimating future costs, volume and profit etc.