For This Assignment Develop A 4 To 6 Page Response Co 640887

For This Assignment Develop A 4 To 6 Page Response Containing Written

For this assignment, develop a 4 to 6 page response containing written narrative, figures, and charts. Milano Co. manufactures and sells three products: product 1, product 2, and product 3. Their unit selling prices are product 1, $40; product 2, $30; and product 3, $20. The per unit variable costs to manufacture and sell these products are product 1, $30; product 2, $15; and product 3, $8. Their sales mix is reflected in a ratio of 6:4:2.

Annual fixed costs shared by all three products are $270,000. One type of raw material has been used to manufacture products 1 and 2. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: product 1, $10; and product 2, $5. However, the new material requires new equipment, which will increase annual fixed costs by $50,000.

If the company continues to use the old material, determine its break-even point in both sales units and sales dollars for each individual product. If the company uses the new material, determine its new break-even point in both sales units and sales dollars for each individual product. (Round to the next whole unit.) What insight does this analysis offer management for long-term planning?

Paper For Above instruction

Introduction

Cost-volume-profit (CVP) analysis is an essential managerial accounting tool that helps business managers understand the relationships among costs, sales volume, and profit. This analysis is critical for strategic planning, especially when evaluating the impact of changes such as new materials or equipment investments. In this paper, we analyze the break-even point for Milano Co., both with the current materials and with a proposed new material, to inform management decisions on long-term planning and profitability.

Background and Context

Milano Co. manufactures three products—product 1, product 2, and product 3—each with distinct selling prices and costs. The mix of sales is in a ratio of 6:4:2, which influences how fixed costs are allocated and how volume impacts profitability. The current raw material used for products 1 and 2 incurs certain variable costs, which form the basis for calculating the contribution margin per unit and, subsequently, the break-even point. The company’s fixed costs amount to $270,000 annually, which need to be recovered through contribution margins generated by sales of all products combined.

The company considers switching to a new, less expensive material. Although this switch reduces variable costs for products 1 and 2, it requires substantial new equipment, increasing fixed costs. Therefore, the analysis involves calculating the breakeven point under both scenarios to determine the viability and profitability of the switch and to support strategic decisions related to long-term capacity planning.

Break-Even Analysis with Current Material

To determine the break-even point, we first calculate the contribution margin per unit for each product. For product 1:

• Selling price: $40
• Variable cost: $30
• Contribution margin per unit: $40 - $30 = $10

Similarly, for product 2:

• Selling price: $30
• Variable cost: $15
• Contribution margin per unit: $15

For product 3:

• Selling price: $20
• Variable cost: $8
• Contribution margin per unit: $12

The sales mix ratio of 6:4:2 indicates that for every 12 units sold in total, 6 units are of product 1, 4 units of product 2, and 2 units of product 3. To incorporate this sales mix into the break-even analysis, we calculate the weighted average contribution margin per unit:

Weighted contribution margin = [(6/12) $10] + [(4/12) $15] + [(2/12) * $12] = $5 + $5 + $2 = $12

Next, we divide the total fixed costs by this weighted contribution margin to find the total units needed to break even:

Break-even units = $270,000 / $12 ≈ 22,500 units

Distributing these units according to sales mix:

• Product 1 units: (6/12) * 22,500 ≈ 11,250 units
• Product 2 units: (4/12) * 22,500 ≈ 7,500 units
• Product 3 units: (2/12) * 22,500 ≈ 3,750 units

To find the break-even sales dollars, multiply units by respective selling prices:

• Product 1: 11,250 * $40 = $450,000
• Product 2: 7,500 * $30 = $225,000
• Product 3: 3,750 * $20 = $75,000

Total sales dollars needed to break even: $450,000 + $225,000 + $75,000 = $750,000.

Break-Even Analysis with New Material

Switching to the new material reduces variable costs for products 1 and 2:

• Product 1: Variable cost decreases from $30 to $20
• Product 2: Variable cost decreases from $15 to $10

The contribution margins per unit with the new material are:

• Product 1: $40 - $20 = $20
• Product 2: $30 - $10 = $20
• Product 3: remains unchanged at $12

The new contribution margins lead to updated weighted contribution margin per unit:

Weighted contribution margin = [(6/12) $20] + [(4/12) $20] + [(2/12) * $12] = $10 + $6.67 + $2 = approximately $18.67

Since the fixed costs increase by $50,000 due to new equipment, total fixed costs now amount to:

$270,000 + $50,000 = $320,000

Calculating the new break-even units:

Break-even units = $320,000 / $18.67 ≈ 17,146 units

Distributing these units according to sales mix:

• Product 1: (6/12) * 17,146 ≈ 8,573 units
• Product 2: (4/12) * 17,146 ≈ 5,716 units
• Product 3: (2/12) * 17,146 ≈ 2,866 units

Corresponding sales dollars:

• Product 1: 8,573 * $40 ≈ $342,920
• Product 2: 5,716 * $30 ≈ $171,480
• Product 3: 2,866 * $20 ≈ $57,320

Total sales dollars needed: approximately $571,720.

Analysis and Strategic Implications

This analysis reveals significant insights for Milano Co.'s management. The switch to the new material decreases both the required units for break-even and the total sales dollars needed to cover fixed costs. The reduction is attributable to the increased contribution margin per unit and the overall decrease in fixed costs relative to contribution margin coverage, despite the higher fixed costs for equipment.

Long-term planning should consider the following points based on this analysis:

• The improved contribution margins with the new material suggest higher profitability margins at increased sales volumes.
• Initial capital expenditure in new equipment, while increasing fixed costs, may be offset by the lower break-even point and higher contribution margins.
• The change reduces risk by decreasing the volume needed to become profitable, providing a cushion against market fluctuations or lower-than-expected sales.
• Careful monitoring of sales mix is essential; shifts in the sales ratio could impact the effectiveness of the current strategy.
• Further analysis should incorporate potential changes in demand, market prices, and operational efficiencies.

In conclusion, strategic investment in new materials and equipment appears advantageous under current estimates, positioning Milano Co. for better profitability and competitive advantage. Nevertheless, ongoing review and adaptability are essential to ensure long-term success.

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