Module 4 Case

Module 4 Case

The paper is aimed at analysing the scenario by employing various managerial accounting techniques. The paper explains the concept of breakeven analysis and contribution margin and attempts to highlights its implementation in the given scenario. It further assesses the scenario and provides valuable recommendations to the company. It also explains other techniques such as return on investments (ROI) and residual income methods for assessing the scenario (Anthony, 2007).

Breakeven analysis is a technique that enables the organization to find out its breakeven point. Breakeven point is the point where the organisation is neither earning profit nor does it has to bear losses. Thus, when operating at the breakeven, the organisation is generating just enough revenues to cover up its expenditures. The breakeven analysis for the scenario is presented in in Table 2. However, in order to analyse the break even, some information needs to be sorted out to make possible the breakeven point calculations (Charles, 2003). This information is presented in the Table 1 below.

TABLE 1

EstimatedDemand

Estimated Probability

Estimated Sales

Estimated Sales Amount

(Units)

(Units)

(Units)

Sales Price $170

Sales Price $200

150,000

0.25

37,500

$6,375,000

$7,500,000

180,000

0.5

90,000

$15,300,000

$18,000,000

200,000

0.25

50,000

$8,500,000

$10,000,000

The breakeven can be calculated by dividing the total fixed cost by contribution margin per unit. Contribution margin is the amount that contributes to cover up the total fixed costs. Similarly, contribution margin per unit is the amount contributed by each sold unit to offset the total fixed costs.

TABLE 2

Sales Price Per Unit

$170

$200

Less: Variable Cost Per Unit

$30

$30

Contribution Margin Per Unit

$140

$170

Total Fixed Cost

$20,000,000

$25,000,000

Breakeven Point (Units)

142,857.14

147,058.82

The breakeven point for the $170 pricing would be 142,856 units, while for $200 pricing would be 147,059 units. Although the contribution margin per unit for $200 pricing is much higher than the other option, the increase in fixed costs impacts the breakeven point adversely and even more units have to be produced to achieve breakeven point ...