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Contribution Margin and Breakeven Analysis - Term Paper Example

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The concept of contribution margin is particularly important when a firm is considering whether to produce one product or another. In this case, contribution margin refers to the difference between the sales from a product and the variable cost per unit, meaning the amount of profit from a product per unit sold (Seal, Garrison and Noreen 200)…
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Download file to see previous pages Therefore, the simulation can be analyzed in terms of these two factors. Maria can decide on which cookie’s production to reduce or increase by considering the contribution margin per unit per cookie type. This means that the cookie with the highest contribution margin per unit should be considered since the fixed cost is assumed equal or constant in every period; therefore, the profits are expected to be higher. The concept of contribution margin will be used to consider the cookies with the lowest contribution per unit, and, therefore, the cookie’s production can be reduced. However, this concept should not be considered if the asking price per unit for the order would result in a contribution margin that would not cover the fixed costs incurred. Since the profits are attained after the fixed costs are deducted from the contribution margin, Maria should consider a state where the asking sales price creates a contribution margin higher than the fixed costs incurred in the production process. The concept of breakeven point is also important in determining the product to produce and the reasons for producing the product. Near-term demand for a product is an important part of the determination of the kind of product to produce. The fact that lemon creme cookies provided increased capacity for production and increased the demand means that Maria should have taken it into consideration. Before the decision of profitability is considered, Maria should consider the demand for the cookies in the near future, since this is what determines the amount of profits, and thus, the survival of the company. The decision to introduce a new type of production in the company is considered as if the company was a starting venture. This means that since the breakeven point for the new blend of cookies is 650,000 packs, Maria should consider the product as a new one. This means that the current production and the expected demand should be a factor in determining the type of cookies to produce. The case study indicates that the current breakeven point for the cookies is 563,000 packs, and increasing capacity would increase in a new breakeven pint of 650,000 packs. The fact the new breakeven point is 650,000 packs should not be factor while considering the cookies to produce, instead, Maria should consider the fact that the production of the butter cookies would result in a loss for the company, therefore, it is advisable that the company produce the new blend of cookies. The decision for Maria would be to stop producing the peanut butter cookies and instead produce the lemon creme cookies. The simulation considered contains many key learning points, but the most important points are the contribution margin, fixed costs, and variable costs. As already described, the contribution margin refers to the difference between the variable cost and selling price per unit of a product, and determines whether a company will be profitable in a fiscal period. The contribution margin is a key point because it involves both the variable costs and selling price of a product, therefore, these factors do not need to be considered separately. The contribution margin determines whether the variable costs per unit incurred in production are enough to justify the selling price, and if the variable costs ...Download file to see next pagesRead More
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