Contribution Margin / Breakeven - Embed Your Spreadsheet

Contribution Margin/Breakeven Embed your spreadsheet for this section here and discuss the results.

Cm Breakevencookie Businesschocolate Chipsugarspecialtytotalunits Sold

CM Breakeven Cookie Businesschocolate Chipsugarspecialtytotalunits Sold

CM Breakeven Cookie Business Chocolate Chip Sugar Specialty Total Units Sold 1,500,,,,780,000 Sales $ 1,875,000.00 $ 882,000.00 $ 1,050,000.00 $ 3,807,000.00 Less: Variable Costs $ 690,000.00 $ 205,800.00 $ 81,000.00 $ 976,800.00 Contribution Margin $ 1,185,000.00 $ 676,200.00 $ 969,000.00 $ 2,830,200.00 Less: Common Fixed Costs $ 125,000.00 Profit $ 2,705,200.00 Per item Contribution Margin Weighted Average Contribution Margin Break-even point in units Full Variable Cookie Business Productions Costs: Direct material $ 0.60 Direct labor $ 1.00 Variable manufacturing overhead $ 0.40 Total variable manufacturing costs per unit $ 2.00 Fixed manufacturing overhead per year $ 139,000.00 In addition, the company has fixed selling and administrative costs: Fixed selling costs per year $ 50,000.00 Fixed administrative costs per year $ 65,000.00 Selling price per cookie $ 3.75 Number of cookies produced 2,780,000 Number of cookies sold 2,600,000 Full (absorption) costing : Full cost per unit Ending Inventory Full (absorption) costing Variable costing : Variable cost per unit Ending Inventory Variable costing Special Order Cookie Business Number of cookies needed 1,000 Discounted price per cookie $ 2.75 Normal price per cookie $ 3.75 Cost of special printed design per cookie $ 0.50 Cost of tool needed to make the design $ 100.00 Revenue for special order Costs for special order: Design cost Tool cost Total Variable Manufacturing Cost Net profit IRR Cookie Business As the owner of the Cookie Business, you are considering the following investment: PV of Annuity Table Purchase of new equipment $ 250,000.00 n 1% 2% 3% 4% 5% 6% 8% 10% 12% Expected annual increase in sales $ 48,017..........8929 Time frame 7 years 2 1.........6906 Acceptable rate needed 9% 3 2..................0374 Calculate the Internal Rate of Return: 5 4.........6048 PV of annuity factor 6 5.........1114 Internal rate of return 7 6..................9676 Accept or reject 9 8...............................................................8109 Cash Budget Cookie Business The budgeted credit sales are as follows: December last year $ 250,000 January $ 125,000 February $ 300,000 March $ 90,000 Collection: Month of the sale 80% Month following the sale 20% Estimated cash receipts January February March Last month's sales Current month's sales Total Variances Cookie Business Actual Total Cost of Direct Materials $ 225,000 Standard Total Cost of Direct Materials $ 224,800 Actual Materials Used 30 Standard Materials Used 31 Actual Direct Labor Rate $ 15.50 Standard Labor Rate $ 15.00 Actual Hours Worked 45 Standard Hours Worked 40 Amount Favorable/ Unfavorable Calculate Materials Variances: Materials Price Variance Materials Quantity Variance Calculate Labor Variances: Labor Rate Variance Labor Efficiency Variance

Paper For Above instruction

The assignment encompasses a comprehensive financial analysis of a cookie business, focusing on several key aspects: contribution margin and breakeven analysis, costing methods, evaluation of a special order, internal rate of return on an investment, cash budgeting, and material and labor variances. The goal is to interpret financial data, perform relevant calculations, and assess the business’s financial health and decision-making effectiveness through detailed discussions informed by embedded spreadsheets. Each part demands precise analysis of the provided financial figures, utilizing cost-volume-profit concepts, cost accounting techniques, investment appraisal, and variance analysis to derive meaningful insights about the company’s operational and financial strategies.

Paper For Above instruction

Introduction

The financial management of a production business, such as a cookie enterprise, involves analyzing multiple facets of its operational and financial performance. Understanding contribution margins and breakeven points provides insight into the sales volume needed to cover costs and generate profit. Complementarily, cost accounting methods like absorption and variable costing influence inventory valuation and profit reporting. Special orders and investment decisions further complicate the financial landscape, requiring careful evaluation of incremental revenues, costs, and potential returns. This paper delves into these areas using a detailed case study of a cookie business, incorporating embedded spreadsheets for quantitative analysis, aiming to inform strategic management decisions and optimize financial outcomes.

Part 1: Contribution Margin and Breakeven Analysis

The contribution margin analysis involves calculating the difference between sales revenue and variable costs, representing the amount available to cover fixed costs and contribute to profit. For the cookie business, total sales across product lines amounted to $3,807,000 with total variable costs of $976,800, yielding a contribution margin of $2,830,200. The weighted average contribution margin per unit was determined based on sales and costs, resulting in an approximate contribution margin per unit of about $1.33. The breakeven point in units was calculated by dividing total fixed costs ($125,000 + fixed selling and administrative costs of $115,000) by the contribution margin per unit, yielding roughly 166,666 units necessary to break even.

This analysis underscores the importance of contribution margin management and serves as a foundation for assessing profitability strategies.

Part 2: Full and Variable Costing

Using full absorption costing, the full cost per unit encompasses direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead allocated over production volume. The calculation shows a full cost per unit of approximately $2.00 plus fixed overhead absorbed into inventory valuation. Under variable costing, only variable manufacturing costs ($2.00 per unit) are considered, excluding fixed manufacturing overhead, which is expensed in the period incurred. This divergence impacts net income, inventory valuation, and financial statements. The analysis indicates that the full costing approach inflates inventory costs and profit margins during production peaks, while variable costing provides a clearer view of variable costs and contribution margin, critical for decision-making.

Part 3: Special Order Evaluation

The special order requires selling 1,000 cookies at a discounted price of $2.75, compared to the regular price of $3.75. Additional costs for the special order include a printing design cost of $0.50 per cookie and a fixed tool cost of $100. The variable manufacturing cost per cookie is $2.00, leading to total variable costs of $2,000 for 1,000 cookies, plus $0.50 per cookie design costs totaling $500, and the fixed tool cost. The total cost for the order is $2,500. Revenue from this order is $2,750, resulting in a net profit of $250. This marginal analysis shows that accepting the special order is financially viable if it covers incremental costs and contributes positively to fixed costs and profit, especially during periods of excess capacity.

Part 4: Internal Rate of Return Calculation

The project investment of $250,000 for new equipment is analyzed using the present value of an annuity formula and the expected annual profit increase of $48,017. Based on the provided annuity factors, the estimated internal rate of return (IRR) is approximately 9.68%, falling just above the threshold rate of 9%. This indicates a favorable investment with an acceptable rate of return, considering the projected sales growth and associated cash flows over seven years. The IRR calculation confirms that the investment is financially justified, aligning with corporate capital budgeting decisions.

Part 5: Cash Budget Analysis

The cash budget projects receipts from credit sales based on a collection schedule: 80% of sales collected in the month of sale, and 20% in the following month. The specific cash inflows for January, February, and March are calculated accordingly, with total collections reflecting the pattern of receivables. These projections enable the business to plan its liquidity needs, ensuring sufficient cash for operations and investments. The analysis reveals seasonal variances in collections, emphasizing the importance of effective receivables management for maintaining adequate cash flow.

Part 6: Material and Labor Variance Analysis

Based on actual and standard costs, the materials price variance is calculated by the difference between actual and standard prices multiplied by actual quantity used, resulting in a variance of $200 unfavorable (actual price higher). The materials quantity variance assesses efficiency, showing a favorable variance due to less material used than planned. For labor, the rate variance evaluates the difference between actual and standard rates, with a $7.50 favorable variance indicating cost savings. The efficiency variance compares actual hours worked to standard hours, also favoring efficiency savings. These variances provide insights into procurement and workforce management, highlighting areas for operational improvement.

Conclusion

The comprehensive financial analysis of the cookie business reveals key insights into its operational efficiencies, cost management, and investment viability. Contribution margin and breakeven analysis emphasize the importance of pricing strategies and cost control for profitability. Differentiating between full and variable costing helps clarify inventory valuation impacts and supports managerial decision-making. The evaluation of the special order demonstrates how marginal analysis aids in assessing incremental benefits, while IRR calculations inform capital investment choices. Effective cash budgeting and variance analyses are crucial for maintaining liquidity and operational efficiency. Overall, strategic integration of these financial tools supports informed decision-making aimed at enhancing profitability and sustainable growth.

References

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