Break-Even and Contribution Margin Analysis

Break-even and contribution margin analysis is an important technique in evaluating and planning for the financial needs of an organization. The use of this analysis

allows managers to determine quantified answers to questions about selling volume, price, profits, and other key business components.

For this Application, you will have the opportunity to use these techniques to aid in decision making for the Great Western Outfitters. You will use the information in

this week’s Resources about contribution margin and break-even analysis to make projections and recommendations for the future of this organization.

You will set up and use an Excel spreadsheet for all your calculations to complete Problems 1 through 6 below. The spreadsheet you develop should be what you turn in

for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.

All work to problems must be shown.
•    Application
Break-Even and Contribution Margin Analysis
Break-even and contribution margin analysis is an important technique in evaluating and planning for the financial needs of an organization. The use of this analysis

allows managers to determine quantified answers to questions about selling volume, price, profits, and other key business components.

For this Application, you will have the opportunity to use these techniques to aid in decision making for the Great Western Outfitters. You will use the information in

this week’s Resources about contribution margin and break-even analysis to make projections and recommendations for the future of this organization.

You will set up and use an Excel spreadsheet for all your calculations to complete Problems 1 through 6 below. The spreadsheet you develop should be what you turn in

for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.

Great Western Outfitters
Complete Problems 1–6  (ALL WORK MUST BE SHOWN FOR PROBLEMS)
1.    The boot department of the Great Western Outfitters store is preparing to set sales goals for the upcoming year. Sally Brown, the department manager, is trying

to determine what brands of boots to retain as part of the sales inventory. In particular, she is wondering about the value of continuing to sell Durango Boots. Going

through past records, she retrieves the following information about the sales of Durango boots and asks you to help her with some calculations:
Total Sales (1,000 pairs of boots)    $500,000
Variable Costs    $300,000
Fixed Costs    $150,000
Tax Rate    25%
2.
3.    Based on this information:
o    Compute the Contribution Margin (CM), unit CM, and CM ratio (remember to include your calculations).
o
o    If the average CM ratio for other brands is 35%, should Brown keep stocking Durango Boots?

4.    Sally Brown discovers that the owner of Great Western Outfitters is a big fan of Durango Boots and wants to continue selling them. As Sally prepares to order

the boots for next year, she needs to determine how many pairs of boots (a pair of boots is one unit) she needs to sell to break even.
Based on the Table from Problem 1:
o    Help Sally compute the break-even point in units and in dollars.

5.    Sally feels strongly that if they are going to carry Durango Boots that they need to do more than just break even.
Based on the Table from Problem 1:
o    How many pairs of boots (units) would the boot department need to sell to obtain a profit of $100,000?
o    How many pairs of boots (units) would the company have to sell to obtain an after tax income of $120,000?
o

6.    Sally Brown is flipping through a popular magazine and sees a photo spread of Garth Brooks, the country singing legend. Prominently on display is his

collection of Durango Boots. Because of this, Sally is certain that the store can expect to sell 250 extra pairs of boots.
Based on the Table from Problem 1:
o    How much will income increase if the sales go up by 250 units? (You can ignore taxes for this problem.)
o    How much will income increase if the store expects sales to go up by $25,000? (ignoring taxes).
o

7.    The top three selling brands of boots at the Great Western Outfitters store are Double-H boots, Durango boots, and Stetson boots.
For the last quarter, sales were as follows:
Double-H Boots    Durango Boots    Stetson Boots
Sales    $400,000    $500,000    $875,000
Variable Costs    $250,000    $300,000    $625,000

Total fixed costs were $507,000.

Using these figures:
o    Determine the sales mix, CM by product and in total, the CM ratio by product and in total, and the net income (ignore taxes).
o
o    Calculate the break-even point in dollars in total and by product.
o
o    Prepare a chart, such as example 12 on page 53(see below), to help you with your answer. Use three decimal places for the percentages. For example, .275 would

be 27.5%

8.    Sally Brown is concerned about the sales numbers for Double-H Boots.
Based on the Table from Problem 5:
o    What is the margin of safety if the company projects sales at $400,000 and the break-even point is $250,000?

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