Contribution Margin and Break Even Analysis

Many factors come into play in determining argumentation success. One of them is the financial factor. For a conjunction to set financial remnants it is decisive that its worry get it on in detail the products or table services they trade or post. This is the compend of two different scenarios at aunty Connies Cookies color (University of Phoenix, 2011) and the financial performance of Jamestown galvanic Supply club (Heiter, et. al. 2008). During two abridgment I applied concepts like unflinching and variable costs, portion marge, break-even point, sputum point, and operating leverage.aunt Connies Cookies Scenario SimulationThe Aunt Connies brand grew successfully producing lemon tree Creme and Mint cookies. maria Villanueva is the current chief executive officer of this family-owned company (University of Phoenix, 2011). She faces critical decisions to compensate because both the lemon creme and muckle cookies charges increased and gross revenue sight decrea sed. mare should rehearse several accounting concepts to r all(prenominal) her goal of increasing gross changes and revenue for the company. Some opport unities and altercates lined up for Aunt Connies Cookies like large mess redacts and the buyout of a competitors factory (University of Phoenix, 2011).A send awaydymaker commissi unmatchedd Aunt Connies Cookies to fill a bulk order of one million packages of the Real Mint cookies delivered in one months time. The stipulations of the order weights greatly on the company as the confectioner will only repair $1. 20 per package, which is much cheaper than the mass market selling at $1. 50 per packet. Rejecting the order may seem foolish as Aunt Connies Cookies has the susceptibility to produce the order, and could be missing out on a uncorrupted opportunity if she declines to fill the order (University of Phoenix, 2011).In deciding which cookies production to reduce, Maria took into account the concepts of parting margin, uni t contribution margin, and operating amplifications. This decision was essential to create sufficient capacity to accommodate the mint cookies bulk order. The contribution margin is the amount of money that remians from the revenue obtained subsequently sales to turn out for fixed expenses and to contribute to the operating lolly after deducting variable expenses. Alternatively, the unit contribution margin of from each one unit sales, in this case each pack of cookies adds to derive.Finally, operating avail is the profit earned from a companys marrow squash business operations, also known as earnings forrader divert and tax (EBIT). Maria calculated the contribution margin and the unit contribution margin for each type of cookie, determined to reduce the production of lemon creme cookies and to increase the production capacity for the bulk order of real mint cookies. Maria can sell mint cookies at $1. 20 per package, beneath the selling price of $1. 50 because the real min t cookies stomach a greater total contribution margin and that the lemon cream cookies provides a greater unit contribution margin.Maria knew that Aunt Connies Cookies should produce much of the cookies with the greater contribution margin per unit to maximize the shops operating profit. If the scenario changed, and the bulk order was for lemon cookies, Maria would take aim to turn over the order to the confectioner. The unit contribution margin for the lemon cookies is smaller and Maria would pass water to increase the production capacity to make the same operating profit as for the mint cookies, to the point of going beyond the factorys production capacity. Maria faced the opportunity to buy a peanut butter cookie plant.She could use this plant to make more lemon creme cookies because the near-term demand exceeded 600,000 packs. The challenge for Maria is to make a decision about(predicate) going out front or not with this business (University of Phoenix, 2011). If the new p lant has a break-even hoi polloi of creme cookies of 650,000 packs, Maria must ensure that Aunt Connies Cookie shop sales the same amount of packs or more. If the business sales less, it will make a loss, if it sells more, it will be a profit. The break-even point in flock is the point where the plants fixed expenses are covered.In the case that Maria considers Aunt Connies Cookie shop cannot sell that much, she may ensure viability of the plant by (1) trying to reduce the fixed costs (e. g. renegotiating rent, reducing telephone bills, insurance, etcetera ), (2) trying to reduce variable costs (e. g. purchasing at humiliate cost the ingredients used to make cookies), or (3) increasing the selling price of the cookies. Any of these strategies can reduce the break-even point in rule book. In the slash of the scenarios, Maria should not buy the peanut butter cookie plant. light upon Learning Points.During the simulation I applied several concepts such as contribution margin, br eak-even point, fixed and variable costs, indifference point, and operating leverage. All these concepts have-to doe with and form part of the cost volume profit epitome tool. The cover of these concepts by managers swear out organizations attain good financial performance. Cost volume profit analysis (CVP analysis) is a powerful tool that can help managers in understanding better the relationship that exists among the cost, the volume, and the profit in a business.Managers can make good business decision if they concentrate in trying to understand the interaction that exists among (1) the prices of product or services, (2) the level of activity, (3) the volume of product , (4) the variable cost per unit, (4) the total fixed costs and (5) and the concoction of the product or services. Business decision may be about changes to companys pricing policy, selection of a marketing strategy to use, choosing which products to manufacture or services to provide, and even about the acqui sion of new companies. The break-even point (BEP) is one subdivision of CVP analysis.BEP is the level of output at which the profit is zero. Break even analysis helps managers determine how far sales can decline before their companies trigger to lose money. The indifference point is the volume at which costs for both labor-intensive operations and equipment intensive operations are equal. When volumes increase, revenues increase. However, the presence of lour variable costs per unit in equipment-intensive operations ensures that the operating profits increase more satisfyingly when compared to labor-intensive operations.Equipment-intensive operations have high fixed costs and lower variable costs per until when compared to labor -intensive operations. Jamestown Electric Supply bon ton. Jamestown Electric Supply Company has been in business for 45 years. The company designs, manufactures, and delivers electrical supplies in various forms to different type of businesses. Jamesto wn invested intemperately in research and development of automotive electronic technology to provide its customers with modern functionality, safety, and performance.Jamestown products have outstanding features that create competitive advantage to commodities that customers love as standard features on all automobiles. Jamestown has hundreds of diverse contracts with different divisions and plants of each of the major automobile manufacturers. Most of the contracts show good gross profit margin on sales, but others do not show satisfying bottom-line profits or show no profit. Although Jamestowns sales, continue to rise, profit declined in the period under analysis from 2003 to 2007 as showed on Exhibit One.Jamestown fall out managers believe that if sales growth remained positive, the problems with the profit would resolve. Warehousing and shipping managers signify that customer service expenses are out of control and causing significant cost increases for the company. Jamestown customer services include overnight delivery of electronic component products, just-in-time inventory deliveries to clients plants, warehousing of client parts, special part stick up services, and many other customer services designed to gain and discover clients. Exhibit One. Jamestown Electric Supply Company Income Statements for 2003 to 2007.Electric Supply Company financial performance is in jeopardy and top management have to change its customer service policy and marketing strategy after carefully analyzing the information obtained after performing a CVP analysis. The focus of the analysis should be in understanding the relationship between product price, volume, per unit variable cost, and the mix of products sold by Jamestown Electric.Calculating the contribution margin on the products which Jamestown Electric sales will allow management to know more in detail how much each unit sale will contribute to the company profit. Calculating the break-even point will provide info rmation about which products do not bring either profit or loss, and about how far sales can decrease before Jamestown Electric starts to lose money. James Electric product cost twist has a higher percentage of variable costs than in fixed costs, which involves less operating leverage or risk. One of he options management should consider is to closely monitor the variable expenses incurred by customer service in order to increase the company profits.Jamestown Electrical Supply Company management will definitely benefit from setting a weak schedule to analyze contribution margins either monthly or every quarter to track product margin performance more accurately. Conclusion Managers can help their organizations achieve a good financial performance when they apply basic accounting concepts in their business strategic plans. Knowing the be relationship between these concepts contribute to ensure their organizations financial success.