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UNIVERSITY OF PEOPLE
BUS 5110
GROUP ACTIVITY CASE STUDY
This case study for the global washer and dryer manufacturer is focused on
calculating the break-even point, contribution margin, NPV, IRR and drop or
keep analysis of different products of a washing company. Every company
that intends making profit must make certain accounting calculations that
will determine their decision making and how these decisions will affect their
profitability.
Break even analysis seeks to help organizations regulate how much they need
to sell periodically to break even on the cost of doing business. Break-even
analysis relies upon the contribution margin because it distinguishes between
fixed costs and the profits that arise from a product's sales and is used to help
in the planning of the sales price of a product. (Luthor, 2019).
Break-Even for High end set
BE for target income = (Total Fixed Costs + Target Income) / Contribution Margin
Per Unit
BE for target income = (Total Fixed Costs + Target Income) /
Contribution Margin Per Unit
High end set = $1,320,000 + $500,00 = $1,820,000/$1225 = 1485.71 units (yr.)
Economical set = $1,218,000 + $300,000 = $1,518,000/$450= 3,373.33 units (yr.)
The high-end set has a high contribution margin and a high variable expense, as
such every increase in units produced will lead to a high variable expense. The
company can look for suppliers who are willing to reduce the price of raw
materials.
The economical set has a low contribution margin and sales increases are met
with significant increases in variable costs. The solution to increasing profits is to
raise prices while maintaining the existing cost structure.
The costing methodology used in this project was the job costing method which
records revenues and cost for each job that results in a unique product and since
this washing company deals with different unique products that require different
materials, this costing methodology is suitable.
Recommendation:
Washer dryer combo product line should be dropped as the analysis shows that
though sales revenue of $(80,000) will be lost, the company saves by eliminating
the variable cost, labor cost, and direct fixed cost when the W/D combo is
dropped.
References