In the profitability of a product. It

In the past few weeks, we have learned about income
statement, balance sheet, cash flow statement and cost management, and how
these financial indicators are essential to determining the economic health of
a company. This assignment focuses on the cost management of a company. Cost
management is a type of management accounting that allows a business to predict
upcoming expenditures to minimize the chance of going over budget.

In this case study, we will analyze the cost management
information of a small catering business and determine how much prices can be
reduced while still maintaining an acceptable profitability margin. In order to
attain an accurate figure, the break-even analysis must be undertaken. Determining
the break-even point will let us know the minimum number of events they can
conduct to achieve zero loss. To attain the break-even point for this
company, I followed the steps listed below:

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Break-even point calculation:

Fixed costs / Contribution per unit (Sales Price per unit – variable
cost per unit)

Fixed costs = tents and structures (500,000) + truck and
vehicles (200, 0000) + permanent staff (3,500,000) = 6,000,000

Variable cost per event = (floral) 200 + (tables) 100+ (soft drinks/kids
snacks) 500+ (temp staff) 1,800 = 2,600

Sale price per event = 4,500 (22,500,000 / 5,000)

Contribution per event = 1,900 (4,500 – 2,600)

 Break-even point = 6,000,000 / 1,900 = 3,158 events 

Purpose of Assigning Cost
Categories of Fixed and Variable Costs

Cost behavior, such as, fixed costs and variable costs,
tells us how costs fluctuate when there is a change in the company’s level of
activity. As we have learned from our readings, fixed costs are costs that
remain constant. For example, the annual salaries for permanent staff. Variable
costs, on the other hand, are costs that vary depending on the volume of unit.
For example, the cost of temporary staff wages. (Agarwal, n.d.)

Relationship
of Variable Costs to Contribution Margin

                The contribution
margin allows companies to determine the profitability of a product. It is the
sales price per unit (per event, in this case) minus variable costs. (Gallo,
2017). The contribution margin represents the earnings available to pay fixed
costs and retained profit. The relationship between contribution margin and
variable costs delivers key figures to make decisions regarding pricing, cost
management and product profitability.

Data Limitation and Missing
Data

It is essential
to know the break-even point to establish a sales price point that guarantees a
profit, but it is just one of the elements of cost-volume-profit analysis; however,
the break-even analysis has its limitations. It is based on assumptions and does
not predict the demand of the company’s product or service. (Richards 2017). One
important question we must ask the small business owner in this case study is, what
is the target profit of the company? Once we have this figure, how can it be
maximized? The net profit of the company is the missing data in this case. To
determine this data, we use the financial information from the break-even
calculation: (Heisinger, & Hoyle, 2012)

Current profit for this company:
Sales – (total variable cost – total fixed cost) =

 22,500,000 (13,000,000 – 6,000,000) =
3,500,000

Sales: 22,500,000

Less variable cost: 13,000,000 (5000×2600)

Contribution per event =9,500,000 (1900 × 5000)

Less Fixed cost. 6,000,000

Target Profit. 3,500,000

In conclusion, cost management
methods provide a company with the necessary instruments to analyze and
strategize its processes. By knowing this information, the business owner can
implement strategies to increase profitability, determine the lowest selling
price, and also measure the company’s productivities. 

x

Hi!
I'm Dana!

Would you like to get a custom essay? How about receiving a customized one?

Check it out