product decisions using break-even analysis

One of the applications of organizing costs according to behaviour is presenting managers with information to advise short-term decisions such as pricing, product mix, special order and make or-buy (curry 2004; Bamber, Braun & Harrison 2008; Drury 2006; Lea 2007). This part of the report deals with product decisions by evaluating three alternative products (A, B and C) to determine which would offer a better return for BSN limited.

Fig 2:

Contribution Margins for Products A, B and C; breakeven point and Margin of safety

Product A Product B Product C
£ £ £
Sales (price per unit x no. of units) 2,250,000.00 3,037,500.00 2,157,300.00
Less Variable costs
Direct labour (hours per unit x no. of units x cost per hr) (540,000.00) (630,000.00) (594,000.00)
Direct material X (kgs per unit x no. of units x cost per kg) (360,000.00) (360,000.00) (499,500.00)
Direct material y (kgs per unit x no of units x cost per kg) (234,000.00) (1,215,000.00) (372,600.00)
Variable overhead (cost per unit x no of units) (297,000.00) (346,500.00) (326,700.00)
contribution Margin (CM) 819,000.00 486,000.00 364,500.00
Less Fixed Costs
Heating and lighting (250,000.00) (250,000.00) (250,000.00)
Rent and rates (375,000.00) (375,000.00) (375,000.00)
Depreciation (180,000.00) (180,000.00) (180,000.00)
Operating income 749,000.00 416,000.00 294,500.00
contribution per unit (CM ÷ no. of units) 27.30 10.80 13.50
contribution margin ratio 36.40% 16.00% 16.90%
units units units
break even point 29,487.18 74,537.04 59,629.63
margin of safety in units 512.82 (29,537.04) (32,629.63)
Margin of safety in £ £        38,461.54 -£ 1,993,750.00 -£ 2,607,107.41

From the analysis of the contributions the three products generate, the BSN limited should produce product A. This is because the product has the highest contribution margin per unit (£ 27.30) among the three products. Product A would thus offer a better return for the resources invested than the other alternatives; hence it is the product that BSN limited should produce. Go to the conclusion here.

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