Ra1 Solution Required Assignment 1 Excel Solution Expected R

Ra1 Solutionrequired Assignment 1 Excel Solutionexpected Response

Determine the overall break-even sales using the contribution margin (CM) ratio. Analyze the impact of allocating fixed costs among individual products and assess managerial decisions based on break-even analysis.

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Breaking down the financial analysis of a multi-product company requires a comprehensive understanding of contribution margin techniques, fixed costs allocation, and managerial decision-making strategies. The scenario involves evaluating the company's overall profitability, individual product contributions, and strategic options such as product elimination.

Initially, the overall contribution margin ratio can be calculated using the total contribution margin relative to total sales. The company's total sales amount to $805,000, and the total contribution margin is $440,000. By dividing the contribution margin by total sales, the contribution margin ratio (CM ratio) is obtained:

CM ratio = Contribution margin / Sales = $440,000 / $805,000 ≈ 0.5466 (or 54.66%).

Using this ratio, the company's break-even sales in dollars can be calculated by dividing fixed expenses ($400,000) by the CM ratio:

Break-even sales = Fixed expenses / CM ratio = $400,000 / 0.5466 ≈ $732,000.

This indicates that the company must generate approximately $732,000 in sales to cover all fixed costs and break even. Achieving this sales volume ensures net operating income equals zero.

However, analyzing individual products requires considering their specific contribution margins and fixed expenses. The contribution margin per unit for each product is derived from sales price minus variable costs:

  • Velcro: Selling price = $1.65, Variable cost per unit = $1.25, Contribution per unit = $0.40.
  • Metal: Selling price = $1.50, Variable cost per unit = $0.70, Contribution per unit = $0.80.
  • Nylon: Selling price = $0.85, Variable cost per unit = $0.25, Contribution per unit = $0.60.

Fixed expenses are allocated to each product based on specific strategies. One approach is to assign fixed costs directly to each product's segment. For simplicity, assume fixed expenses are allocated proportionally based on sales revenue:

  • Velcro: $20,000 fixed expense.
  • Metal: $80,000 fixed expense.
  • Nylon: $60,000 fixed expense.

Total fixed expenses sum to $160,000 for individual product fixed costs. Including an apportioned share of common fixed costs (initially overlooked) ensures a more precise assessment of each product's break-even point. The common fixed costs are allocated proportionally based on sales revenue: Velcro (20.50%), Metal (37.27%), Nylon (42.24%).

Allocated common fixed expenses are then: Velcro ($49,193), Metal ($89,441), Nylon ($101,366), summing to $240,000 total fixed costs. Adding these to product-specific fixed expenses gives the total fixed costs attributable to each product for break-even analysis.

Calculating the break-even point for each product in units involves dividing the total fixed costs allocated to the product by its contribution margin per unit:

  • Velcro: Fixed costs = $69,193; Contribution margin = $0.40; Break-even units ≈ 172,983 units.
  • Metal: Fixed costs = $169,441; Contribution margin = $0.80; Break-even units ≈ 211,801 units.
  • Nylon: Fixed costs = $161,000; Contribution margin = $0.60; Break-even units ≈ 268,333 units.

None of the products' break-even sales volumes align with their actual annual sales, indicating potential strategic issues. For example, Velcro's actual annual sales are 100,000 units, but its break-even volume is approximately 173,000 units, suggesting the product is currently unprofitable at their existing sales levels.

This discrepancy leads to critical managerial decisions. Should the company retain products that do not meet their adjusted break-even points after fixed cost allocations? Maintaining unprofitable products could drain resources, yet their contribution to covering common fixed expenses must also be considered. If Velcro and Metal are dropped, the company's profitability will decline, as these products contribute about $100,000 toward fixed costs and profit. The loss incurred after discontinuation would be approximately $60,000, considering fixed and variable costs, which reflects the importance of understanding contribution margins and the collective impact of product lines.

Dropping unprofitable products reduces total fixed costs but does not eliminate all fixed expenses, particularly those that are common and allocated across products. The company must evaluate whether the strategic focus on the core product — Nylon — outweighs the potential loss of revenue from dropping other products. It is also crucial to recognize that the simplified break-even analysis can be misleading if fixed costs are not accurately allocated and if the impact on overall profitability is not thoroughly assessed.

Furthermore, the analysis excludes behavioral aspects such as market demand, brand positioning, and longer-term implications of product discontinuation. For instance, maintaining a product might be justified if it attracts other profitable customer segments or complements existing products, even if it operates at a loss in isolation.

In managerial decision-making, the appropriate allocation of fixed costs and the understanding of contribution margins are fundamental in determining product profitability and business sustainability. The techniques demonstrated, including the contribution margin approach, proportional cost allocation, and break-even calculations, provide a quantitative foundation for strategic decisions.

Consequently, management should use these insights to evaluate each product's profitability comprehensively. Strategic decisions should consider not only the immediate financial impact but also market positioning, long-term growth potential, and overall contribution to corporate objectives. For example, retaining a product with low margin but high strategic value may be justified, whereas dropping a product with a marginal contribution that contributes significantly to covering fixed costs may not be advisable.

In conclusion, effective managerial decision-making relies on accurate cost analysis, appropriate allocation of fixed costs, and understanding the collective contribution of products to overall profitability. The contribution margin technique, combined with strategic evaluation of product lines and fixed costs, enables managers to make informed, data-driven decisions that align with the company's long-term goals.

References

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