Product mix has an enormous impact on corporate profits, except for those very rare cases where all products happen to have the same profit margins. To determine how the change in mix will impact profits, it is best to construct a chart, such as the one
0% 50% 100%
Percentage of Production Utilization Breakeven Point
Fixed Costs Variable
Costs Income
Taxes Net Profit
Most Expensive Level of Variable Costs
Least Expensive Level of Variable Costs
Highest Price per Unit
Lowest Price per Unit
Revenue
Variable Costs Income Taxes Revenue
Fixed Costs
Income Taxes
Exhibit 5.5 Breakeven Chart Including Impact of Variable Pricing Levels
5-5 How Can the Product Mix Alter Profitability? 115
shown in Exhibit 5.6, that contains the number of units sold and the standard margin for each product or product line, and the resulting gross margin dollars. The resulting average margin will impact the denominator in the standard breakeven formula. For example, if the average mix for a month’s sales results in a gross margin of 40 percent, and fixed costs for the period were $50,000, the breakeven point would be $50,000/40 percent, or $125,000. If the product mix for the following month were to result in a gross margin of 42 percent, the breakeven point would shift downward to $50,000/42 percent, or $119,048. Thus, changes in product mix will alter the breakeven point by changing the gross margin number that is part of the breakeven formula.
5-6 HOW DO I CONDUCT A ‘‘WHAT-IF’’ ANALYSIS WITH A SINGLE VARIABLE?
When the accountant must determine the answer to a formula where one element varies, the simplistic approach is to create a table containing all possible expected values of the variable, and calculate the answer for each one. Though workable, this approach is slow. Instead, consider using the table-fill function of Excel to more rapidly develop an answer. An example is shown in Exhibits 5.7 through 5.9. In Exhibit 5.7, we have set up a formula to determine the present value of a series of payments of $1,500 per payment, extending over eight periods. However, the interest rate could vary, so a results table has been created below the present value calculation, showing a range of possible interest rates in quarter-percent increments. Comment fields show the present value calculation in cell C8, and also show that the information appearing in cells B12 and C12 at the top of the results table are references from cells C4 and C8, respectively. All other interest rates shown in cells B13 to B32 are typed in.
The main task remaining is to fill in the present value for each of the interest rates shown in the results table. We could recreate the present value calculation next to each of those interest rates, but there is an alternative approach.
The alternative method is to highlight the range of cells from B12 to C32, and then access the Data, Table command in Excel. This results in the screen shown in Exhibit 5.8, where a data entry pop-up screen asks where the input value comes from (the interest rate field in cell C4), and whether we want the results to appear vertically in a column, or horizontally in a row. Since we want the present value results to appear in a Exhibit 5.6 Calculation Table for Margin Changes Due to Product Mix
Product Unit Sales Margin % Margin $
Flow meter 50,000 25% $12,500
Water collector 12,000 32% 3,840
Ditch digger 51,000 45% 22,950
Evapo-Preventor 30,000 50% 15,000
Piping connector 17,000 15% 2,550
Totals 160,000 36% $56,840
column next to the interest rates that have already been entered in column B, we enter C4 in the ‘‘Column input cell’’ field in the pop-up screen, as shown in the exhibit.
The result is shown in Exhibit 5.9, where Excel has automatically filled in the pre- sent value for each of the interest rates in the results table, ranging from a present value of $9,694.82 for a 5 percent interest rate to $8,002.39 for a 10 percent interest rate.
Exhibit 5.7 Layout of a Single-Variable Table
5-6 How Do I Conduct a ‘‘What-If’’ Analysis with a Single Variable? 117
5-7 HOW DO I CONDUCT A ‘‘WHAT-IF’’ ANALYSIS WITH DOUBLE VARIABLES?
The problem becomes more difficult when there are two variables in the formula, since the range of possible answers becomes much greater. In this case, the use of automation tools becomes more helpful to the controller, since the alternative is to manually create a large number of formulas.
Exhibit 5.8 Data Table Input for a Single-Variable Table
Exhibit 5.9 Completed Single-Variable Table
5-7 How Do I Conduct a ‘‘What-If’’ Analysis with Double Variables? 119
We will continue with the present value example used for single-variable analysis to illustrate how double variables can be addressed. In Exhibit 5.10, we assume that both the interest rate and the duration of payments may vary, which yields a large number of possible present values that shall be con- tained within a grid covering cells C13 to G33. Possible interest rates are listed down the left side of this grid, as was the case for the single-variable calculation, Exhibit 5.10 Layout of a Double-Variable Table
while the number of possible periods is displayed in a row across the top of the grid.
For the double-variable calculation to function properly, the present value result cell must be placed in the top-left corner of the results table, where the column and row headings intersect. The point of this intersection is cell B12, which in turn references the present value result cell, which is located at cell C8.
The next step is to reformat cell B12 to identify it as ‘‘Interest Rate,’’ even while the underlying formula is still present. To achieve this step, click on cell B12 and then access the Format, Cell commands in Excel. This will bring up the Format Cells screen, which is shown in Exhibit 5.11. As shown in the exhibit, click on the
‘‘Custom’’ field under the Category heading, then select the ‘‘General’’ option under the Type heading, and enter ‘‘Interest Rate’’ in the Type data entry field. The number in cell B12 will be replaced with the words ‘‘Interest Rate,’’ though the underlying formula will still be present.
Next, highlight cells B12 through G33, which places cell B12 in the upper- left corner of the results table. This tells Excel the location of the present value calculation that it will replicate throughout the results table. Then access the Data, Table command in Excel. This creates a data entry pop-up screen, as shown in Exhibit 5.12, which asks for the source of the number of periods in the present value calculation (which is cell C5), as well as the source of the interest rates to be used in the same calculation (which is cell C4).
After completing the data entry pop-up screen and clicking on OK, Excel automatically populates the results table with a complete set of present values for all interest rates and periods listed in the table. The final result is shown in Exhibit 5.13.