According to the text, a break-even point can be computed for any assumed mix of sales and a break-even chart or P/V graph can be constructed for any sales mix (2012). For (a) – the Break even= Contribution Margin from the original estimates is $1,013,000 and for (b) – the Margin of Safety, take the grand total sales number of all items and the total contribution margin and subtract it: $1,013,000 – 2,480,000 = $1,467,000 and to get the percentage, take the total from the subtracted formula ($1,467,000) and divide it by the grand sales total (2,480,000) = $1,467,000/2,480,000 = 59.15%. Revised Estimates – Break-even/Margin of Safety (4)
For (a) – the Break even= Contribution Margin from the original estimates is $992,500 and for (b) – the Margin of Safety, take the grand total sales number of all items and the total contribution margin and subtract it: $992,500 – 2,550,000 = $1,557,500 and to get the percentage, take the total from the subtracted formula ($1,557,500) and divide it by the grand sales total (2,550,000) = $1,557,500/2,550,000 = 61.08%. Herbert’s Concern – (5)
Herbert should not be concern about the place mats because the contribution margin is the second highest of the four products and the highest contribution margin per unit of the four products. Granted if the place mats were to be closed, it would reduce the profit of the company, but from the original estimates and the revised estimates, the place mats are generating contribution margin. In regards to the variable cost, it is below the selling price, but the place mats should not be discontinued. Conclusion
Herbert from Mendel Paper Company should not be concern about the place mats, the data is there to help Herbert realize that that the place mats bring in profit than making the company lose profit, especially with it being the second highest CM. A company should not discontinue an item if the item is making the company some type of product, but if there are other variables involved such as updated machinery that requires more time and energy that costs the company more money, than the company should look at the things that are not doing as well and that does not have a high demand for.
Managerial accounting: Decision making for the service and manufacturing sectors. (2012). San Diego, CA: Bridgepoint Education.