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Contribution Margin and Breakeven Analysis

Essay by   •  August 15, 2011  •  Case Study  •  713 Words (3 Pages)  •  1,734 Views

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Contribution margin and breakeven analysis

There are many factors that need to be considered when trying to decide the future of a company. Maria Villanueva is faced with many challenges in trying to increase her profits. In the process of assessing all the options which include buying another plant to increase the capacities to produce her lemon crème and thin mints or buys the plant and take on the production of the peanut butter cookies as well. The contribution margin and the break even analysis are ratios that will help Maria in her future endeavors. .

Bulk Order

When assessing whether or not to accept the bulk order Maria has to evaluate all the options. A decision needs to be made that will help increase the profits while expanding her company. In evaluating the contribution margin to see how see can use it to increase her profits she might want to consider increasing her marketing expenditures in order to reach a greater volume of customers. Also Maria could lower the cost of her lemon crème cookies therefore reducing the contribution margin per unit(University of Phoenix, 2011). These decisions might aide in increasing her profits. To free up capacity to talk the bulk order might involve the decreasing of the product that does not have the best contribution margin which would be the thin mints. Maria should not accept the bulk order if she is not able to increase her profits or if she does not a least reach her breakeven point.

Break even volume

When Maria is trying to make a decision on what to do about her lemon cookies at the new plant in order to reach her break even volume, she might consider increasing the production of the lemon crème cookies. Because the demand is so great for the lemon crème cookies and they yield the highest contribution margin there should not be a huge change in the contribution margin or the profits it yields. Maria should always look at the prices and her expenditures when making these decisions.

Key learning points

While going though the simulation there were three key learning points which are important when running a business and making decisions about the future of the company. The contribution margin which is the product revenue minus the product variable cost divided by the product revenue is an indicator of profitability. All businesses strive to reach maximum profitability with minimal cost the contribution margin can help a business determine this. Another key learning point is operating leverage. According to the Noble foundation, operational leverage," measures a firm's fixed versus variable costs. The greater proportion of fixed costs, the greater the operating leverage" (Noble Foundation, 2011). Fixed costs are items that remain unchanged from month to month. A company would rather have fixed costs

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