Introduction to managerial accounting - Case Study Example

Fixed expenses divided by the CM ratio calculates breakeven in terms of dollars. The profit of a company at the breakeven point is cero dollars (Peavler). Hacker Gulf has variable costs of $40 ($28 + $12) per unit. The monthly fixed expenses of the company are $24,000 per month. The fixed expenses of the company yearly are $288,000. The current sales price of the company is $70 per gulf club. The calculations below show the current breakeven point of the company in units and dollars. Fixed costs = 288000 Sales = 70 Variable cost = 40 Contribution margin = (70 – 40) = 30 Breakeven in units = 288000 / 30 = 9600 units CM ratio = 30/ 70 = 0.

428 Breakeven in dollars = 288000 / 0.428 = $672,000 The breakeven point of Hacker Gulf is 9,600 units or $672,000. Based on the assumption that the company raises its sales price to $80 instead of $70 the breakeven point of the firm would change. A higher sales price will lower the breakeven point due to the fact that the contribution margin is larger. The calculation below shows the breakeven point of the firm under the assumption of a sales price at $80. . rget profit = (fixed expenses + target profit) / unit contribution margin Dollar sales to attain target profit = (fixed expenses + target profit) / CM ratio The company has the target of obtaining $50,000 in profit selling its gulf clubs at $80.

The calculations below show the units and dollars needed to obtain a target profit of $50,000. Fixed costs = 288000 Sales = 80 Variable cost = 40 Contribution margin = (80 – 40) = 40 Sales to target profit = (288000+50000) / 40 = 8450 units CM ratio = 40/ 80 = 0.50 Sales to target in dollars = (288000+50000) / 0.50 = $676,000 The sales needed to obtain a target profit of $50,000 are 8,450 units or $676,000. The data used to obtain a target profit of $50,000 can be used to create an income statement for the company.

An income statement using the contribution margin approach is illustrated below. Sales 676000 Variable costs 338000 Gross margin 338000 Fixed costs 288000 Net income 50000 The income statement shows that the company obtained a net income of $50,000. The purpose of the income statement is to show the profitability of a company. The net margin of the company is 7.40%. The variable expenses of the firm account for 54% of its costs, while the fixed expenses cover the other 46% of the costs. A way to increase the profitability of the firm is by sourcing its materials from cheaper suppliers located in China or another developing nation.

Increasing the sales price to $80 is the correct strategy for the company. The increase in the price of the gulf clubs to $80 helped the company reduce its breakeven point from 9,600 units to 7,200. A higher sales price also improved the overall profitability of the company as illustrated by the increase in contribution margin of the firm. The managers have to take an in-depth look at the