Ontribution Margin and Breakeven Analysis paper
Complete the Contribution Margin and Breakeven Analysis simulation.
Write a 1,050to 1,400-word paper in which you address the following:
a? When Maria was considering a large bulk order, how should she use the concept of contribution margin to decide which cookieas production to reduce to free up enough capacity to accept the bulk order? Under what circumstances should she not have accepted the bulk order?
a? When Maria was considering buying the peanut butter cookie plant, one of her options was to convert it to make more lemon crA?me cookies, because near-term demand for the lemon crA?me cookies exceeded current capacity by 600,000 packs. What should Maria have done if the break-even volume of lemon crA?me cookies in this new plant were 650,000 packs and continuing to make peanut butter cookies would not have been profitable?
a? Identify three key learning points from the simulation with respect to the application of concepts such as fixed costs, variable costs, contribution margin, break-even point, indifference point, and operating leverage to an organizationas overall financial performance. Briefly summarize each learning point and justify why you believe these to be key learning points.
a? Identify a University Library article in which the operating results of a company are reported. Analyze the financial performance of the company using the three key learning points that you have identified.
a? Based on the article, infer a key operating decision that the company must address in the next year. How will the three key learning points that you identified play a role in this key operating decision or its outcomes?
Format your paper consistent with APA guidelines.
BELOW IS THE STIMULATION
Aunt Connies Cookies is a brand that makes lemon and real mint cookies through the country. Maria Vilianueva, the grandniece of the owner, is now the CEO of the family-owned business. In this simulation, Ms. Vilianueva appoints me as the COO. My job is to make the decisions with an outcome to maximize the firms contribution margin and operating profits.
Aunt Connies Cookies was approached to produce a bulk order of one million packs of real mint cookies to be completed in one months time. The company needed to decide if completing this order will be a good option. Maria suggested that we increase our ad expenses by half for both the cookies. She stated that we need to reach out to more retailers in the metro areas and pay more to our distributors. I believe that Marias suggestion should not be followed because in order to maximize the operating product, it is better to produce more of the lemon cookies because it has a greater contribution margin per unit than the real mint. This meant that the current production of real mint cookies should be reduced.
The bulk order should not be considered when the cookie production for both types of cookies exceeds production capacity. This would mean that the company is incapable of completing the order. Also, Aunt Connies Cookies should not consider accepting a bulk order if the asking sales price per unit for the order is at a price that would produce results where the contribution margin is less than the fixed costs. Therefore, it would not be worth it to the company to fulfill the order.
The breakeven point for manufacturing lemon cookies in the new plant is 563,000 packs. The decision to manufacture 600,000 packs resulted in operating profits from the new unit, which met the exact monthly production target for lemon cookies. This has increased the overall profits. If the breakeven volume of lemon cookies is increased to 650,000 packs and continuing to make peanut butter cookies would not have been profitable and the organization operation may result in operating profits. Since the variable cost per unit for making lemon cookies is higher in the new unit the decision has led to a reduction in overall profits.
The three key learning points that are addressed in the simulation are: breakeven point, fixed costs, and variable costs. Breakeven point is the total sales volume at which there is neither operating profit nor operating loss at the breakeven point. Breakeven point is used in the second scenario of the simulation when the company was seeking to maximize operating profits and produce more of the product that had a greater contribution margin per unit. Fixed cost does not change in total as the volume of activity changes. Fixed costs remain constant in spite of changes in output, but will vary if expressed on a per-unit of activity basis. Variable cost is a cost that changes in total as the volume of activity changes. Labor and material costs are typically variable costs that increase as the volume of production increases. It takes more labor and material to produce more output, so the cost of labor and material varies in direct proportion to the volume of output. One could observe this occurring in the simulation when cookie production increased.
In conclusion, it takes more than just a great product for a business to remain strong and profitable. To ensure the longevity of Aunt Connies Cookies, various items need to be taken into consideration. The major factor is costs. Along with keeping fixed costs low, variable costs must be analyzed. When preparing a budget, management must first determine all costs. The company must analyze those costs and project sales revenue. Determining the breakeven point is a good starting point.