Description
Discuss your answers to the following questions:
- Would an increase in variable costs per unit cause a company’s break-even point to increase or decrease? Why?
- Would an increase in unit selling price cause a company’s break-even point to increase or decrease? Why?
- An examination of the accounting records of Alinma Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, discuss a likely means of improving operating income. Explain your answer by sharing the calculations needed.
- Both Alireza Company and Jarir Company had the same unit sales, total costs, and operating income for the current fiscal year; yet, Alireza Company had a lower break-even point than Jarir Company.Discuss the reason for this difference in break-even points and provide and example of this calculation.
Embed course material concepts, principles, and theories (which requires supporting citations) along with at least one scholarly, peer-reviewed reference supporting your answer. Keep in mind that these scholarly references can be found in the Saudi Electronic Library by conducting an advanced search specific to scholarly references.
You are required to reply to at least two peer discussion question post answers to the weekly discussion question. These peer replies need to be substantial and constructive in nature. They should add to the content of the post and evaluate/analyze that answer. Normal course dialogue does not fulfill these two peer replies but is expected throughout the course. Answering all course questions is also required.
First Mate
1). Would an increase in variable costs per unit cause a company’s break-even point to increase or decrease? Why?
Break Even Point is given by the equation:
Break Even Point = Fixed Cost / Contribution per unit
When variable cost increases, the contribution per unit will decrease, thereby leading to an increase in the break-even point (Kampf et al., 2016).
2). Would an increase in unit selling price cause a company’s break-even point to increase or decrease? Why?
An increase in the selling price would lead to an increase in the Contribution Margin, thereby resulting in a decrease in the break-even point, which implies we can achieve BEP early (Singh and Deshpande, 1982).
3). An examination of the accounting records of Alinma Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, discuss a likely means of improving operating income. Explain your answer by sharing the calculations needed.
Facts:
- High Contribution Margin, and
- Production below Max Capacity.
In the given case Company is unable to utilize its maximum capacity resulting in production of lesser number of units which in turn leads to under-absorption of Fixed Cost leading further to decrease in the operating profits.
Example:
Contribution per unit = $60
Capacity = 10,000 units
Production = 6,000 units
Fixed cost = $300,000
Production = 6,000 units
Operating Profit = 6,000 units * $60 - $300,000
= $60,000
Production = 8,000 units
Operating profit = 8,000 units * $60 - $300,000
= $180,000
Production = 10,000 units
Operating profit = 10,000 units * $60 - $300,000
= $300,000
As we can see from the above calculations, the operating profit increases from $60,000 to $180,000 to $300,000 as the level of production increases from 6,000 units to 8,000 units to 10,000 units.
4). Both Alireza Company and Jarir Company had the same unit sales, total costs, and operating income for the current fiscal year; yet, Alireza Company had a lower break-even point than Jarir Company. Discuss the reason for this difference in break-even points and provide and example of this calculation.
Break Even Point = Fixed Cost / Contribution per unit
Company
Alireza Company
Jarir Company
Sales Unit (say)
10,000
10,000
Total Cost (say)
$200,000
$200,000
Operating Income (say)
$50,000
$50,000
BEP (say)
2,000
3,000
Possible Reasons:
Variable Cost per unit of Alireza Company is lower than that of Jarir Company
Company
Alireza Company
Jarir Company
Sales Unit (say)
10,000
10,000
Total sales (Total cost + operating income)
$250,000
$250,000
Selling Price per unit
$25 per unit
$25 per unit
Total Cost (say)
$200,000
$200,000
BEP (say)
2,000
3,000
Variable Cost
2,000 = ($200,000 - V.C. p.u.*10000) / (25 – V.C. p.u.)
V.C. = $18.75
3,000 = ($200,000 –
V.C. p.u.*10,000) / (25 – V.C. p.u.)
V.C.= $17.857143
Fixed Cost
Fixed Cost = $200,000 - $18.75 * 10,000
Fixed Cost = $12,500
Fixed Cost = $200,000 - $17.857143 * 10,000
Fixed Cost = $21,428.57
As we can see above, the break even point of Alireza Company (2,000 units) is lower than that of Jarir company (3,000 units), because the variable cost per unit of Alireza Company ($18.75 per unit) is higher than that of Jarir Company ($17.86 per unit), but the fixed cost of Alireza Company ($12,500) is lower than that of Jarir Company ($21,428.57).
References
Kampf, R., Majer?ák, P., & Švagr, P. (2016). Application of break-even point analysis. Naše More: International Journal of Maritime Science & Technology, 63(3), 126-128.
Singh, S. P., & Deshpande, J. V. (1982). Break-even point. Economic and Political weekly, 17(48), 123-128.
Second mate:
Discussions related to cost volume profit analysis
- Would an increase in variable costs per unit cause a company’s break-even point to increase or decrease? Why?
- Would an increase in unit selling price cause a company’s break-even point to increase or decrease? Why?
Changes to the variable cost can impact the break-even point. An increase in the variable cost will result in increasing the break-even point. This is because the variation cost is a component used in calculating the contribution margin and an increase in the variable cost would decrease the contribution margin. The contribution margin is then used to calculate the break even point as the break even point equals the fixed cost divided by the contribution margin. So the increase in the variable cost will decrease the contribution margin which will increase the break-even point. A simple example to clarify this, is an increase in the cost of direct materials cost per unit would result in higher costs leading to an increase in the cost or quantities needed to reach the break even point where the revenue equals the expenses. On the other hand, an increase in the selling price would result in a decrease in the break-even point, because an increase in the sales will increase the contribution margin which will decrease the break-even point (Warren, 2020).
- An examination of the accounting records of Alinma Company disclosed a high contribution margin ratio and production at a level below maximum capacity. Based on this information, discuss a likely means of improving operating income. Explain your answer by sharing the calculations needed.
In order to improve the operating income, Alinma company need to increase sales so it can increase the contribution margin. The increase in the contribution margin will increase operation income:
Contribution margin = Sales – variable cost
Operating income = Contribution margin – Fixed cost
Another possibility is to reduce the variable cost while maintaining the sales, so that the contribution margin will increase, and this will increase operating income. A third option is to try to reduce the fixed cost, by finding means to do that like reducing or avoiding taxes in a legal way, or reducing supervisors’ salaries, as those will result in a higher operating income. Lastly, it is also possible to increase production in order to increase sales, as the example suggest that the production level is below the maximum capacity, because increase in sales will increase the contribution margin which will increase the operating income (Warren, 2020).
- Both Alireza Company and Jarir Company had the same unit sales, total costs, and operating income for the current fiscal year; yet, Alireza Company had a lower break-even point than Jarir Company.Discuss the reason for this difference in break-even points and provide and example of this calculation.
The break event point is calculated using the fixed costs and the contribution margin. The higher the fixed cost the higher the break event point. In addition, the contribution margin takes into account the sales and variable cost. Since the sales is the same for both companies, then the variable cost is obviously different. We should also remember that the total cost equal the sum of the variable cost and the fixed cost. So it is clear that Jarir has a higher fixed cost and a lower variable cost than Alireza Company. The equations for the break-even point and total cost were shown in a case study (Mishra, 2021), and can be calculated as follows:
Break even point = fixed cost / contribution margin
Total cost = fixed costs + variable costs
References:
Mishra, S., & Mishra, M. A case study on Cost-Volume-Profit Analysis. SAMAGRA GYAN JOURNAL. 7(7).
Warren, C. S., & Tayler, W. B. (2020). Managerial accounting (15 th ed). Cengage
Explanation & Answer
View attached explanation and answer. Let me know if you have any questions.
MANAGEMENT DISCUSSION BOARD
1
1. Would an increase in variable costs per unit cause a company’s break-even
point to increase or decrease? Why?
Increase in break-even with the increase in Variable Costs. Contribution margin is
equal to sales minus variable costs. In the event that variable costs grow without
a matching increase in revenue, the break-even point will increase to counteract
the loss. This implies that you will need to sell more units in order to cover fixed
expenses. Altering the product mix is another way to increase the break-even
point, especially if the average contribution margin drops.
2. Would an increase in unit selling price cause a company’s break-even point
to increase or decrease? Why?
Cost increases typically have a negative effect on a company. They could raise
the BEP or lower the company's profit, respectively. A company would need to sell
more products to break even or turn a profit as costs rose. Businesses frequently
have to decide whether to absorb rising costs or pass those costs on to customers
by raising pricing. You must sell enough units to pay fixed costs in order to break
even. Your break-even point may rise if fixed expenses like rent, salary, and
utilities rise. The likelihood of the company suffering a loss will therefore increase
3. An examination of the accounting records of Alinma Company disclosed a
high contribution margin ratio and production at a level below maximum
capacity. Based on this information, discuss a likely means of improving
operating income. Explain your answer by sharing the calculations needed.
If sales can be produced, a high contribution margin ratio and perfect capacity point
to the possibility of increasing income from operations. Consequently, a significant
sales promotion effort should be implemented to increase sales to their maximum
potential and benefit from the low ratio of variable costs to sales.
4. Both Alireza Company and Jarir Company had the same unit sales, total
costs, and operating income for the current fiscal year; yet, Alireza Company
had a lower break-even point than Jarir Company.Discuss the reason for this
difference in break-even points and provide and example of this calculation.
Compared to Jarir Co, Alireza Co. had lower fixed expenses and a larger
proportion of variable costs to sales. Because of this, Alireza Co.'s breakeven point
was lower. For example, Alireza’s expense didn’t match with their average variable
cost, they didn’t have any match to par with it hence there was no break-even
point.
REFERENCES
MANAGEMENT DISCUSSION BOARD
2
Barstow, Sharon (2019, August 7) “What Will Increase a Company's Break-Even Point?”
https://yourbusiness.azcentral.com/increase-companys-breakeven-point-28264.html
Acquired on October 2, 2022
BBC “Revenue and Costs” https://www.bbc.co.uk/bitesize/guides/znf88xs/revision/4
Acquired on October 2, 2022
MANAGEMENT DISCUSSION BOARD
1
1. Would an increase in variable costs per unit cause a company’s break-even
point to increase or decrease? Why?
Increase in break-even with the increase in Variable Costs. Contribution margin is
equal to sales minus variable costs. In the event that variable costs grow without
a matching increase in revenue, the break-even point will increase to counteract
the loss. This implies that you will need to sell more units in order to cover fixed
expenses. Altering the product mix is another way to increase the break-even
point, especially if the average contribution margin drops.
2. Would an increase in unit selling price cause a company’s break-even point
to increase or decrease? Why?
Cost increases typically have a negative effect on a company. They could raise
the BEP or lower the company's profit, respectively. A company would need to
sell more products to break even or turn a profit as costs rose. Businesses
frequently have to decide whether to absorb rising costs or pass those costs on
to customers by raising pricing. You must sell enough units to pay fixed costs in
order to break even. Your break-even point may rise if fixed expenses like rent,
salary, and utilities rise. The likelihood of the company suffering a loss will
therefore increase
3. An examination of the accounting records of Alinma Company disclosed a
high contribution margin ratio and production at a level below maximum
capacity. Based on this information, discuss a likely means of improving
operating income. Explain your answer by sharing the calculations needed.
If sales can be produced, a high contribution margin ratio and perfect capacity
point to the possibility of increasing income from operations. Consequently, a
significant sales promotion effort should be implemented to increase sales to
their maximum potential and benefit from the low ratio of variable costs to sales.
4. Both Alireza Company and Jarir Company had the same unit sales, total
costs, and operating income for the current fiscal year; yet, Alireza
Company had a lower break-even point than Jarir Company.Discuss the
reason for this difference in break-even points and provide and example of
this calculation.
Compared to Jarir Co, Alireza Co. had lower fixed expenses and a larger
proportion of variable costs to sales. Because of this, Alireza Co.'s breakeven
point was lower. For example, Alireza’s expense didn’t match with their average
variable cost, they didn’t have any match to par with it hence there was no
break-even point.
MANAGEMENT DISCUSSION BOARD
2
REFERENCES
Barstow, Sharon (2019, August 7) “What Will Increase a Company's Break-Even Point?”
https://yourbusiness.azcentral.com/increase-companys-breakeven-point-28264.html
Acquired on October 2, 2022
BBC “Revenue and Costs” https://www.bbc.co.uk/bitesize/guides/znf88xs/revision/4
Acquired on October 2, 2022
View attached explanation and answer. Let me know if you have any questions.
MANAGEMENT DISCUSSION BOARD
1
1. Would an increase in variable costs per unit cause a company’s break-even
point to increase or decrease? Why?
Increase in break-even with the increase in Variable Costs. Contribution margin is
equal to sales minus variable costs. In the event that variable costs grow without
a matching increase in revenue, the break-even point will increase to counteract
the loss. This implies that you will need to sell more units in order to cover fixed
expenses. Altering the product mix is another way to increase the break-even
point, especially if the average contribution margin drops.
Expenses directly related to a product or the acquisition of products for sale are
considered variable costs. Breakeven can be greatly delayed by high overhead.
High variable costs imply that you must sell a lot of products or services to have a
gross profit large enough to offset fixed costs and start-up expenses. The timing
of break-even points is also influenced by your company's pricing tactics. High-end
vendors frequently charge a large markup over variable expenses for their
products. As a result, the gross profit is considerable. A high gross profit allows
you to defray fixed and startup costs by generating more revenue from each sale.
The gross profit margins of low-cost providers are frequently lower. This implies
that in order to eventually break even, companies must sell many more things,
which frequently takes more time.
2. Would an increase in unit selling price cause a company’s break-even point
to increase or decrease? Why?
Cost increases typically have a negative effect on a company. They could raise
the BEP or lower the company's profit, respectively. A company would need to sell
more products to break even or turn a profit as costs rose. Businesses frequently
have to decide whether to absorb rising costs or pass those costs on to customers
by raising pricing. You must sell enough units to pay fixed costs in order to break
even. Your break-even point may rise if fixed expenses like rent, salary, and
utilities rise. The likelihood of the company suffering a loss will therefore increase
It is also important to remember that the contribution margin per unit is equal to the
sales price per unit less the variable cost per unit. For instance, if the selling price
of a book is $100 and the variable expenses to produce it are $5, the contribution
margin per unit is $95 and helps to balance the fixed costs.
3. An examination of the accounting records of Alinma Company disclosed a
high contribution margin ratio and production at a level below maximum
MANAGEMENT DISCUSSION BOARD
2
capacity. Based on this information, discuss a likely means of improving
operating income. Explain your answer by sharing the calculations needed.
If sales can be produced, a high contribution margin ratio and perfect capacity point
to the possibility of increasing income from operations. Consequently, a significant
sales promotion effort should be implemented to increase sales to their maximum
potential and benefit from the low ratio of variable costs to sales. Lower the price
of items. To lower your cost of goods sold, collaborate with your suppliers. Your
costs can be cut if you can work out a lower pricing, a volume discount, or other
cost-saving arrangement. A further expense that often goes unnoticed is product
packing. To reduce additional cost per item, take into account a less expensive
product package design. If you maintain your pricing at current levels while cutting
costs, your profit margin on your products will improve, boosting your revenue.
Enhance inventory control. Always be aware of how many things you have
available and how quickly they can sell. Every pre-opening, shift change, and
closing time, conduct daily inspections. You may sell more products and use fewer
markdowns if you have effective inventory management, which will enable you to
make better decisions regarding purchases, sales, and marketing. The average
order value should rise. An excellent strategy to boost your sales is to encourage
customers who already shop at your store to add more items to their baskets.
You've already been successful in convincing customers to make a purchase from
your store; now look for strategies to increase their spending. Find things that are
likely to be bought together to start. When a consumer decides to buy a product,
suggest related products. You may now put your most profitable products on the
home page of your e-commerce site in addition to the shop window and the ideal
location in the store where visitors naturally gravitate. Put your greatest sellers and
upsells close to the counter to encourage spontaneous purchases and raise
average order value.
4. Both Alireza Company and Jarir Company had the same unit sales, total
costs, and operating income for the current fiscal year; yet, Alireza Company
had a lower break-even point than Jarir Company.Discuss the reason for this
difference in break-even points and provide and example of this calculation.
Compared to Jarir Co, Alireza Co. had lower fixed expenses and a larger
proportion of variable costs to sales. Because of this, Alireza Co.'s breakeven point
was lower. For example, Alireza’s expense didn’t match with their average variable
cost, they didn’t have any match to par with it hence there was no break-even
point. When the two prices are equal, the break even point is attained. Fixed
expenses are frequently to blame for there not being a break even point. As a
result, it is also possible to determine how many units must be sold to pay the fixed
MANAGEMENT DISCUSSION BOARD
3
costs and bring the business to a profit. Calculate the contribution margin, which
is the product's sale price less variable costs, to do this.
REFERENCES
Barstow, Sharon (2019, August 7) “What Will Increase a Company's Break-Even Point?”
https://yourbusiness.azcentral.com/increase-companys-breakeven-point-28264.html
Acquired on October 2, 2022
BBC “Revenue and Costs” https://www.bbc.co.uk/bitesize/guides/znf88xs/revision/4
Acquired on October 2, 2022
CFI Team (2022, April 28) “Break Even Analysis”
https://corporatefinanceinstitute.com/resources/knowledge/modeling/breakeven-analysis/ Acquired on October 2, 2022
Kokemuller, Neil “What Affects a Company's Breakeven Point?“
https://smallbusiness.chron.com/affects-companys-breakeven-point-66092.html
Acquired on October 2, 2022
MANAGEMENT DISCUSSION BOARD
1
1. Would an increase in variable costs per unit cause a company’s break-even
point to increase or decrease? Why?
Increase in break-even with the increase in Variable Costs. Contribution margin is
equal to sales minus variable costs. In the event that variable costs grow without
a matching increase in revenue, the break-even point will increase to counteract
the loss. This implies that you will need to sell more units in order to cover fixed
expenses. Altering the product mix is another way to increase the break-even
point, especially if the average contribution margin drops.
Expenses directly related to a product or the acquisition of products for sale are
considered variable costs. Breakeven can be greatly delayed by high overhead.
High variable costs imply that you must sell a lot of products or services to have
a gross profit large enough to offset fixed costs and start-up expenses. The
timing of break-even points is also influenced by your company's pricing tactics.
High-end vendors frequently charge a large markup over variable expenses for
their products. As a result, the gross profit is considerable. A high gross profit
allows you to defray fixed and startup costs by generating more revenue from
each sale. The gross profit margins of low-cost providers are frequently lower.
This implies that in order to eventually break even, companies must sell many
more things, which frequently takes more time.
2. Would an increase in unit selling price cause a company’s break-even point
to increase or decrease? Why?
Cost increases typically have a negative effect on a company. They could raise
the BEP or lower the company's profit, respectively. A company would need to
sell more products to break even or turn a profit as costs rose. Businesses
frequently have to decide whether to absorb rising costs or pass those costs on
to customers by raising pricing. You must sell enough units to pay fixed costs in
order to break even. Your break-even point may rise if fixed expenses like rent,
salary, and utilities rise. The likelihood of the company suffering a loss will
therefore increase
It is also important to remember that the contribution margin per unit is equal to
the sales price per unit less the variable cost per unit. For instance, if the selling
price of a book is $100 and the variable expenses to produce it are $5, the
contribution margin per unit is $95 and helps to balance the fixed costs.
MANAGEMENT DISCUSSION BOARD
2
3. An examination of the accounting records of Alinma Company disclosed a
high contribution margin ratio and production at a level below maximum
capacity. Based on this information, discuss a likely means of improving
operating income. Explain your answer by sharing the calculations needed.
If sales can be produced, a high contribution margin ratio and perfect capacity
point to the possibility of increasing income from operations. Consequently, a
significant sales promotion effort should be implemented to increase sales to
their maximum potential and bene...
