Performing profitability analysis requires an understanding of selling prices and the behavior of activity cost drivers. (Activity cost driver is often referred to as cost driver when the context is clear that we are discussing activity, rather than structural or organizational, cost drivers.) Profitability analysis is widely used in the economic evaluation of existing or proposed products or services. Typically, it is performed before decisions are finalized in the operating budget for a future period. This report shows the analysis done to find out the changes in the profit when the costs increase and how much of sales is requires to achieve the targeted profits and also the selling price that is required to achieve the targeted profit. For the CVP analysis it is assumed that the total costs can be segregated into fixed and variable costs, the fixed cost remains constant during the relevant period, variable cost per unit remains constant during the period of consideration and the selling price will also be constant irrespective of the volume sold during the year 2007/ 2008. It is also assumed that the production and sales volume will remain constant. With these assumptions as the background, the calculation of the effect of profit is calculated when there is the change in selling price, sales volume and cost of resources are made and submitted. It is mentioned that the expected sales, variable costs an fixed costs will change in the year of 2007/ 2008. The reason for the increase in fixed cost is the increase in the selling expenses due to expected increase in sales volume and the increase in administration costs are due to the expected increase in salaries. Hence, we have to find out, the relative sales volume to earn the target profits and the new selling price when the sales volume increases by 10% and 20%. These analyses help to understand the triangular relationship between the costs, the volume of sales and profits.
Profitability at Hardhat Limited The Relationships between Revenues