Break-Even Analysis In Multiproduct Environment

Break Even Analysis Multiproduct Environment

Break-Even Analysis: Multiproduct Environment

Donald Tweedt started a company to produce and distribute natural fertilizers. The company sells two fertilizers: green fertilizer and compost fertilizer. Green fertilizer sells for $16 per 30-pound bag and incurs variable costs of $10 per bag. Compost fertilizer sells for $12 per bag with variable costs of $8. Total fixed costs are $35,000. Demand for both is equal. Calculate the number of green fertilizer bags needed to break even.

Target Profit Analysis

Kingman Corp. sells fire extinguishers at an average price of $10, with variable costs of $4, and fixed costs of $92,000. The company aims for an after-tax profit of $60,000. With a tax rate of 40%, determine the number of extinguishers to sell to achieve this profit goal.

Make or Buy: Effect on Income

Engstrom, Inc., uses 10,000 pounds of a component annually, currently purchased at $11 per pound. The company has idle capacity and can produce the component internally, with costs including a manufacturing expense and a $32,000 supervisor salary. Determine the change in income if Engstrom makes the component instead of buying it.

Limited-Resource Decision

Kerrie Velinsky Productions produces two types of music CDs, with a total fixed overhead of $240,000 and only 100,000 machine hours available. Compute the contribution margin per machine hour for each CD to decide which product maximizes income under the resource constraint.

Sell-or-Process Further Decision

DePaulis Furniture makes unfinished dining chairs that cost $65 to produce and sell for $85. Finishing them increases costs to $90, but finished chairs sell for $125. Evaluate whether finishing the chairs is profitable based on additional costs and revenues.

Matthew Hagen's company plans to introduce a new neon sign product, forecasted to sell 700 units at $75 each, with variable costs of $25, and a $30,000 investment in new equipment. Determine the break-even sales volume, profit targeting sales, and effects of price and cost changes on breakeven.

Special-Order Decision: Qualitative Factors

Lindsey Smith, Inc., assesses accepting special orders at differing prices and quantities, considering the impact on profit, competitive positioning, and customer relationships.

Decision Focus: Eliminating Unprofitable Segments

Casagrande Company operates at 80% capacity, with sales and costs provided. Analyze the current operating profit, the impact of eliminating unprofitable segments, and qualitative factors influencing management's decision.

CVP: What-If Analysis

Mayes Company has a contribution margin of 30%, fixed expenses of $120,000, and sales of $550,000, a 10% increase over last year. Find the contribution margin ratio needed to increase net income by $15,000. Calculate Burger Queen Restaurant’s operating leverage and projected income with a 30% sales increase.

Break-Even Analysis

Jimmy's Seafood Restaurant served 1,000 meals last month with variable costs of $10 per meal and fixed costs of $25,000. Calculate the average selling price per meal.

Paper For Above instruction

Break-even analysis in a multiproduct environment is a critical aspect of managerial accounting, providing vital insights into how firms can achieve profitability amidst multiple product lines. Unlike single-product firms, multiproduct companies face the complexity of allocating fixed costs, analyzing contribution margins, and understanding the impact of sales mix on overall profitability. This paper examines various applications of break-even analysis and related decision-making tools through practical examples, including the analysis of a fertilizer company's product mix, profit goals with different tax implications, cost-saving decisions, resource constraints, and special orders, among others.

In the case of Donald Tweedt's fertilizer company, the challenge was to determine the sales volume needed for green fertilizer to reach the break-even point in a scenario that involves multiple products and different cost structures. The approach relied on calculating the contribution margin per unit and utilizing the fixed costs to find the break-even volume. Given the selling price of $16 and variable costs of $10 for green fertilizer, with fixed costs of $35,000, the contribution margin per bag was $6. The break-even point in units is calculated as fixed costs divided by contribution margin per unit. Therefore, break-even units = $35,000 / $6 ≈ 5833.33, meaning approximately 5834 bags of green fertilizer need to be sold to cover all fixed costs.

Similarly, Kingman Corp.'s target profit analysis demonstrated the importance of understanding after-tax profits. The company plans to achieve an after-tax profit of $60,000 with a tax rate of 40%, which requires calculating the pre-tax profit that accounts for taxes. The pre-tax profit needed is determined by dividing the desired after-tax profit by (1 - tax rate): pre-tax profit = $60,000 / (1 - 0.40) = $100,000. Next, the number of extinguishers to be sold is calculated based on contribution margin per unit and fixed costs. With a selling price of $10, variable costs of $4, and contribution margin of $6, the units required are $ (fixed costs + pre-tax profit) / contribution margin = ($92,000 + $100,000)/$6 ≈ 31,000 units.

The make-or-buy decision involving Engstrom's component illustrates the importance of differential analysis in cost management. By comparing the avoidable manufacturing costs (excluding the supervisor salary if it is avoidable) against the purchase cost, the company can determine whether to produce in-house or outsource. If accountings costs for manufacturing, including variable costs and the additional supervisor salary, are lower than the purchase price, then making is justified. Otherwise, outsourcing remains preferable.

Under capacity constraints, as in Kerrie Velinsky Productions' example, analyzing contribution margin per machine hour allows optimal product selection. For each CD, the contribution margin per unit is divided by the machine hours required per unit. The product with the highest contribution margin per hour should be prioritized to maximize income within limited resource availability.

The sell-or-process further decision for DePaulis Furniture involves analyzing whether additional processing yields enough incremental profit. The decision hinges on comparing the increased costs to the additional revenue gained. Finishing the chair for $25 more in cost and increasing its selling price from $85 to $125 yields an incremental profit of $35, suggesting that finishing the chair is financially beneficial.

Matthew Hagen's neon sign venture epitomizes the application of break-even analysis for new product launches. With fixed costs of $30,000 and a selling price of $75, variable costs of $25, the break-even point is calculated as fixed costs / contribution margin per unit = $30,000 / ($75 - $25) = 600 units. To achieve a profit of $15,000, the sales volume must increase, considering the same contribution margin, leading to calculations that inform pricing and sales strategies under different scenarios.

The acceptability of special orders is a strategic decision influenced by incremental costs and potential profits. If sporadic orders can be fulfilled with idle capacity and do not affect regular sales, accepting at lower prices might be advantageous. Conversely, accepting large or low-priced orders might harm overall profitability if it causes customer dissatisfaction or marketing cannibalization.

Eliminating unprofitable segments within capacity constraints involves analyzing revenues and fixed costs associated with segments. If the segment's contribution margin covers variable costs and contributes towards fixed costs, it remains viable. Eliminating unprofitable segments can improve overall profit, especially if fixed costs are avoidable, but qualitative factors like brand image, customer relationships, and strategic positioning should also influence decisions.

CVP analysis incorporates what-if scenarios, such as changing contribution margins or sales volumes, to project profitability. For Mayes Company, increasing sales by 10% and maintaining fixed costs necessitates calculating the new contribution margin ratio required for targeted income increases. Similarly, understanding operating leverage at Burger Queen enables assessment of how sales fluctuations impact net operating income, guiding strategic planning.

Finally, analyzing Jimmy's Seafood Restaurant's break-even point involves using the average meal price calculation based on total fixed and variable costs and served meals, critical for setting sales targets and pricing strategies in hospitality management.

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