Bus 5110 - Break Even Points

Week 3 Written Assignment

BUS 5110 – AY2017-T5

Edward Valinski

University of the People

To the outside observer it can seem obvious that a company might be performing well financially. They may witness a steady stream of customers coming and going, observe shelves stocked full of the latest and greatest inventory, and a positive impression of the company conveyed by the clever marketing they may see.  However, the true story lies in objective financial indicators that are central to determining the economic health of a business. In addition, “Cost management information is developed for use “within” the firm to facilitate management…” (Blocher, E. J., Cokins, G., Juras, P., & Stout, D. E., 2010).  One example of cost management information is a company’s break-even point.

In the case of the business on which we are focusing for this assignment, let’s call it Acme Co., the break-even point would be the number of events Acme Co. must support in order to cover all of its expenses. To determine the break-even point for this company I began with three financial indicators to calculate the break-even point: fixed costs, variable costs and the selling price. The steps are outlined below:

Break-Even Calculation

• Fixed cost: 500,000 + 2,000,000 + 3,500,000 = 6,000,000
• Variable cost (per event): 200 + 500 + 100 + 1,800 = 2,600
• Sale price (per event): 22,500,000 / 5,000 = 4,500
• Contribution margin (per event): 4,500 - 2,600 = 1,900

Break-Even point: Fixed cost / contribution = 6,000,000 / 1,900 = 3,158 events

Purpose of Assigning Cost Categories

        The purpose of assigning cost categories helps an organization to understand, plan, and manage its costs. Although costs may be classified into distinct categories based on type, they may also be categorized based their behavior such as fixed and variable costs.

Fixed costs are static and do not fluctuate with changes in production output. An example of a fixed cost would be office space leasing costs.

Variable costs are dynamic and change proportionately with the volume of production. Example of a variable costs for Acme Co. are the costs of floral arrangements, soft drinks and snacks, table arrangements, and temporary staff wages.

Contribution Margin and Variable Costs

Contribution margin, defined as selling price minus variable cost, is a measure of the ability of a company to cover variable costs with revenue (Wilkinson, J., 2017, May 25) and the remaining is profit or revenue placed in reserve to cover fixed costs.  The relationship provides an organization with the means to make important decisions related to pricing, cost management, product profitability, and acceptable profit thresholds.

Data Limitations and Missing Data

Even though the determination of the break-even point is important for a company to understand, what is missing is the answer to the Acme Co.’s question “How far can prices be lowered without losing money?” and the more important question “Where can changes be made to maximize profits?”  In my attempt to answer both questions posed by Acme Co., I used the financial information used in the break-even calculation to determine the data missing:

• Sales: 22,500,000
• Less variable costs: 5,000 × 2,600 = 13,000,000
• Contribution margin: 1,900 × 5000 = 9,500,000
• Less Fixed cost: 6,000,000
• Profit: 3,500,000

Using this information, Acme Co. now has a better indication of not only how much lower selling prices may be set but also can use this specific financial data to answers their original question.  In addition, this data can assist with strategic planning that addresses fluctuations in the market, competitive strategies, and potential cost reductions.  Furthermore, knowing the company’s net profit can serve as a means to measure its efficiencies and compare itself against its competitors.