Prepare Breakeven Analysis And CVP Analysis Planning

Prepare Breakeven Analysis And A C V P Analysis Planning Future Sales

Write Company has a maximum capacity of 200,000 units per year. Variable manufacturing costs are $12 per unit. Fixed overhead is $600,000 per year. Variable selling and administrative costs are $5 per unit, and fixed selling and administrative costs are $300,000 per year. The current sales price is $23 per unit.

Required: What is the breakeven point in (a) sales units and (b) sales dollars? How many units must Write Company sell to earn a profit of $240,000 per year? A strike at one of the company's major suppliers has caused a shortage of materials, so the current year's production and sales are limited to 160,000 units. To partially offset the effect of the reduced sales on profit, management is planning to reduce fixed costs to $841,000. Variable cost per unit is the same as last year. The company has already sold 30,000 units at the regular selling price of $23 per unit. What amount of fixed costs was covered by the total contribution margin of the first 30,000 units sold? What contribution margin per unit will be needed on the remaining 130,000 units to cover the remaining fixed costs and to earn a profit of $210,000 this year?

Paper For Above instruction

Introduction

The breakeven analysis and contribution margin analysis are fundamental tools in managerial accounting that assist businesses in understanding the relationship between costs, sales, and profits. These tools are vital for planning, decision-making, and strategic growth, especially when it comes to setting sales targets and pricing strategies. This paper explores the breakeven point, the necessary sales volume for desired profits, and the impact of cost changes on profitability, using the case of Write Company as a practical example.

Breakeven Analysis

The initial step is to determine the breakeven point in both units and dollar sales. The breakeven point occurs where total sales revenue equals total costs, resulting in zero profit. To calculate this, we need to determine the contribution margin per unit, which is the difference between the unit sales price and total variable costs.

The variable costs per unit include manufacturing and selling & administrative costs: $12 (manufacturing) + $5 (selling/admin) = $17. The contribution margin per unit is therefore $23 (selling price) - $17 (variable costs) = $6.

Fixed costs include fixed manufacturing overhead and fixed selling & administrative costs: $600,000 + $300,000 = $900,000.

To find the breakeven point in units:

Breakeven units = Total Fixed Costs / Contribution margin per unit = $900,000 / $6 = 150,000 units.

In sales dollars, this equates to:

Breakeven sales dollars = Breakeven units Selling price = 150,000 $23 = $3,450,000.

Profit Target Analysis

To determine the number of units the company must sell to earn a profit of $240,000, we add this profit to fixed costs and divide by the contribution margin per unit:

Required units = (Fixed Costs + Desired Profit) / Contribution margin per unit = ($900,000 + $240,000) / $6 = 1,140,000 / 6 = 190,000 units.

Given the company’s maximum capacity is 200,000 units, selling 190,000 units is feasible within capacity. The corresponding sales in dollars are:

Sales dollars = 190,000 * $23 = $4,370,000.

Impact of the Supplier Strike and Cost Reduction

Due to a supplier strike, production is limited to 160,000 units, with fixed costs reduced to $841,000. The variable costs per unit remain unchanged at $17. The initial 30,000 units sold at $23 each generated a contribution margin per unit of $6, consistent with previous calculations.

The contribution margin total for the first 30,000 units is:

Contribution margin = 30,000 * $6 = $180,000.

This contribution margin covers part of the fixed costs; the amount of fixed costs covered by these contributions is $180,000.

Remaining fixed costs after the initial units are:

Remaining fixed costs = $841,000 - $180,000 = $661,000.

To achieve a profit of $210,000, the total contribution margin needed from the remaining 130,000 units is:

Total contribution margin required = Fixed costs + Profit target = $661,000 + $210,000 = $871,000.

Contribution margin per unit for remaining units must be:

Contribution margin per unit = Total required contribution / number of units = $871,000 / 130,000 ≈ $6.70.

Since the contribution margin per unit at the current selling price is $6, to meet the target, the company must increase the contribution margin per unit to approximately $6.70. This could be achieved through increased prices or reduced variable costs, but given the scenario of maintaining the same variable costs, the company might consider raising prices or seeking efficiencies.

Conclusion

The analysis demonstrates that Write Company’s breakeven point is at 150,000 units, with sales of $3,450,000. To reach the profit goal of $240,000, it needs to sell 190,000 units, representing revenue of $4,370,000. The disruption caused by the supplier strike limits current sales, but with fixed cost adjustments and strategic pricing, the company can still meet its profit targets. The case emphasizes the importance of flexible planning and cost management strategies in maintaining profitability amidst operational challenges.

References

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