Learning To Finance

CONTRIBUTION MARGIN AND BREAKEVEN ANALYSIS SIMULATION

Contribution Margin and Breakeven Analysis Simulation

Contribution Margin and Breakeven Analysis Simulation

Maria Villanueva, the Chief Financial Officer of Aunt Connie's Cookies, must make several decisions in the "Contribution Margin and Breakeven Analysis" Simulation in order to maintain the success of the company. These decisions involve applying the concept of both contribution margin and breakeven analysis to make the best decision for the company. When evaluating the financial position of the company, Maria must analyze the contribution margins of the products supplied by Aunt Connie's Cookies to determine the direction of the company. Maria must also evaluate the breakeven point of the company when making a decision on whether or not to purchase another company.

According to Marshall, McManus and Viele, the contribution margin is defined as the contribution to fixed expenses and operating income from the sale of product or provision of service (2004). While the breakeven point for a company is defined as the point of revenue in which there is no profit or loss for the company. Both of these concepts will help Maria make the best decisions for the company during the course of the simulation. When applied to a business, the concepts of contribution margin and breakeven analysis can assist a company in making the best decision for a company to stay ahead financially.

When using the concept of contribution analysis, Maria can determine whether or not to accept the bulk order of cookies. In the "Contribution Margin and Breakeven Analysis" Simulation, Maria must understand that according to the contribution margin the company will benefit by producing the most profitable product (UOP Simulation, 2006). For Aunt Connie's Cookies, the most profitable product is its lemon crиme cookies. By producing more of the lemon crиme cookies, Maria can expect an increase in the company's profits. Since the lemon crиme cookies produce the highest contribution margin, it would be ideal for the company to accept the bulk order. However, when analyzing the mint cookies in which the company produces, Maria's best decision for the company would be to reject the bulk order because of the fact that it produces a lower contribution margin. By this determinant, Maria could decide that accepting the bulk order in this situation would be a loss for the company. And, Aunt Connie's Cookies would like to increase its profit, not decrease them or suffer additional losses.

Maria also had to make a decision regarding the purchase of a peanut butter cookie plant.