Case Study: Cost Volume Profit Analysis and Fortescue Metal Group Limited

Value: This assessment task accounts for 20% of the final mark.

Due Date: Friday 3rd June, 2016 at 6:00pm –Blackboard Turnitin (soft copy) and in Unit Co-ordinators mailbox (hard copy).

Case Study on Cost Volume Profit Analysis and Fortescue Metals Group (FMG)

The following documents are available on Blackboard:

  • Fortescue Metals Group (FMG). 2014. Annual Report 2014. http://fmgl.com.au/media/2114/20140916-annual-report231.pdf
  • Fortescue Metals Group (FMG). 2015. Annual Report 2015. http://fmgl.com.au/media/2590/fortescue-annual-report-fy15.pdf
  • Gilroy, Annie. 2015. “What Impacts Iron Ore Miners’ Break-Even Costs?.” Market Realist, 9 October, 2015.
  • Sanders, Amanda. 2015. “A $US40 iron ore price will actually help BHP and Rio.” Australian Financial Review, 3 December, 2015.
  • Ingram, Tess. 2016. “Iron ore break-even points halve but unlikely to dive much further: Citi.” Sydney Morning Herald, 21 April 2016.

Based on the information provided on Blackboard and your own individual research, answer the following questions on cost volume profit analysis and the iron ore market:

  1. Why is an uderstanding of cost behaviour important (e.g. fixed costs, variable costs, etc.).
  2. Explain the meaning of ‘contribution’, and ‘break-even analysis’ and discuss their usefulness.
  3. Break-even/CVP analysis seems to be a great tool. Does it have any weaknesses?
  4. Analyse FMG 2014 and 2015 Annual Reports and discuss the factors that influence the miners’ break-even costs.
  5. Analyse the iron ore industry market and discuss which iron ore comapanies are at most risk.


Formatting Requirements:

Document:

Your assignment must be typed using 12 font, 1.5 line spacing and 2.5 cm margins on all sides, with a maximum length of 1,500 words (excluding in-text references and bibliography). State the word count at the beginning of the assignment. All material over 1,500 words will be disregarded.

Referencing:

You can refer to real world cases, recent news, book chapters, and research papers to support your arguments or analyses. Do NOT use another student’s paper or a website as your reference. This report must be your own work.

All your references must be properly cited in your content and included in the reference list at the end of report.

Plagiarism is a serious academic offence. Students should get familiar with Curtin policy on plagiarism to avoid committing the offence. Student Guidelines for Avoiding Plagiarism and Student Checklist to Prevent Plagiarism can be downloaded from

http://academicintegrity.curtin.edu.au/global/studentbook.cfm.

Submission:

The hard copy of your report must be submitted to your tutor in class on the due date and time.

The soft copy of your work must also be submitted via Turnitin on Blackboard by the due date and time. (You can refer to http://www.youtube.com/watch?v=PcbGIAcNXjs  for how to submit your Turnitin assignment.)

Please note that the Blackboard site may be taken offline occasionally for maintenance purposes. During these maintenance periods, you will not have access to the materials on Blackboard and will not have access to Turnitin. Curtin Technology Services (CITS) will notify the university community of the scheduled maintenance work generally around two weeks in advance. Please make sure to check your Curtin email regularly and to pay attention to the maintenance schedule since this can affect the submission of your assessment tasks.

Late submissions will not be accepted.

File Format and File Name:

MS Word with a file name “Student ID_ACCT5021_S1_2016_Case3”. 

For example, for a student with a student ID 1234567, the file name should be 1234567_ACCT5021_S1_2016_Case3.docx.

Case #3:          Individual Research Assignment on CVP and FMG will be graded using the following question weighting and evaluative criteria:

QuestionPoorMarginalSoundGoodExcellentTotalMark
         
1Why is an uderstanding of cost behaviour important (e.g. fixed costs, variable costs, etc.).  2 – 34 – 56 – 77 – 89 – 1010 
2Explain the meaning of ‘contribution’, and ‘break-even analysis’ and discuss their usefulness.  2 – 34 – 56 – 77 – 89 – 1010 
3Break-even/CVP analysis seems to be a great tool. Does it have any weaknesses?  2 – 34 – 56 – 77 – 89 – 1010 
4Analyse FMG 2014 and 2015 Annual Reports and discuss the factors that influence the miners’ break-even costs.  6 – 89 – 1112 – 1415 – 1718 – 2020 
5Analyse the iron ore industry market and discuss which iron ore comapanies are at most risk.  6 – 89 – 1112 – 1415 – 1718 – 2020 
6Presentation quality, graphs, tables, spelling and the use of correct grammar  2 – 34 – 56 – 77 – 89 – 1010 
 Total     80 
 Comments:                           

Cost Behavior Importance

            The analysis of cost behavior is crucial in any business ventures since it helps in the prediction of whether profits will be made or losses incurred. As the production volume changes, various changes may occur in the cost of production, leading to a negative or positive change. Considering a situation where there is an increase in the cost of production of the goods, the production cost also increases as there is also an increase in the variable cost. On the other hand, a decline in the cost of production will lead to a decrease in the production cost. The phenomenon is termed as variable cost (Hood & Mark P, 2013). Notably, some cost may remain the same even if there is a change in the volume that is termed as fixed cost. Fixed cost usually remains the same regardless of the number of items one sells or makes for a given product. Examples include rent, property tax, insurance of the factory, the salary of the workers and factory building depreciation (Hood & Mark P, 2013). The analysis of the cost behavior is important since it helps in the practical use of the accounting information in the managerial decision making. Citi found out that cutting on the cost of production will provide a temporary solution towards reducing the breakeven point, since the risk of an increase is still high since cost behavior entails an extensive chain, which needs to be analyzed as a whole (Reporter, 2016). Taking other factors into account will be paramount in the growth of the FMG, as it has an advantage regarding geographic location. The Western Australia companies are located close to the world’s biggest ore market (China) compared to Brazil based mining companies (Reporter, 2016). Furthermore, the Australian currency has not been weakened by the recent external tailwinds as was the case with the South African Rand.

            Contribution and Break-Even Analysis

            Kachru (2009) defines contribution margin as the difference between the sales cost and variable cost. Contribution margin is often used by the managerial departments in many companies in controlling and planning operations. The margin can be applied in a situation where there is an increase or decrease in the sales and variable cost. On the other hand, the breakeven point is a situation where the company either makes profits or losses in its business operations. The breakeven point problem was felt by the world’s largest iron ore producers in 2013, and this was marked with the fluctuation of the local currencies, which resulted in low prices for the mineral ore.

            Strengths and Weaknesses of Break-Even Analysis             The analysis of the breakeven parameters is essential for a given business. First, it is a very simple concept and the formula can be understood and applied by any entrepreneur…

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