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GROUP ACTIVITY

UNIVERSITY OF PEOPLE
BUS 5110
GROUP ACTIVITY CASE STUDY
 This case study for the global washer and dryer manufacturer is focused on
calculating the break-even point, contribution margin, NPV, IRR and drop or
keep analysis of different products of a washing company. Every company
that intends making profit must make certain accounting calculations that
will determine their decision making and how these decisions will affect their
profitability.
 Break even analysis seeks to help organizations regulate how much they need
to sell periodically to break even on the cost of doing business. Break-even
analysis relies upon the contribution margin because it distinguishes between
fixed costs and the profits that arise from a product's sales and is used to help
in the planning of the sales price of a product. (Luthor, 2019).
Break-Even for High end set

 Contribution margin = Revenue - Variable expense


 Sale Price = $ 3,500
 Variable expense = $ 875+$1400=$ 2275
 CM = $3500-$ 2275 = $1225
 BE = Total Fixed Costs / Contribution Margin Per Unit
 Total fixed cost = $25000+$85000 = $ 110,000/$1225= 89.8
 BE in unit = 89.8 units
 To compute for a year, we will multiply the Fixed/Allocated Cost by 12
 Total fixed cost = $110,000*12 = 1,320,000/1225 = 1077.55
 BE in unit = 1077.55 units (company must sell 1077.55 units to cover expenses before
starting to generate profit)
BREAK-EVEN FOR ECONOMICAL SET
 BE for Economical set
 CM=$ 1000-$550=$450
 BE=$101500/$450= 225.6 units.
 To compute the BE for the year, we will multiply the Total Fixed cost by 12
 BE=$101,500*12 = $1,218,000/450 = 2,706.7 units (company must sell 2706.7
units to cover expenses before starting to generate profit)

 BE for target income = (Total Fixed Costs + Target Income) / Contribution Margin
Per Unit
 BE for target income = (Total Fixed Costs + Target Income) /
Contribution Margin Per Unit
 High end set = $1,320,000 + $500,00 = $1,820,000/$1225 = 1485.71 units (yr.)
 Economical set = $1,218,000 + $300,000 = $1,518,000/$450= 3,373.33 units (yr.)
 The high-end set has a high contribution margin and a high variable expense, as
such every increase in units produced will lead to a high variable expense. The
company can look for suppliers who are willing to reduce the price of raw
materials.
 The economical set has a low contribution margin and sales increases are met
with significant increases in variable costs. The solution to increasing profits is to
raise prices while maintaining the existing cost structure.

 2. BE for Combination dryer


     Contribution margin = Contribution per unit / sales
                                   = ($2,250 - $595 - $795) / $2,250
                                   = 38.22%
 = $2250 - $1390 =$860
 BE= $20750 *12/$860 = 289.53 units approx. 290 units
 To illustrate our recommendation to management, we will use the 290 units
computed above for our case study computation to arrive at our
recommendation:
1) Present Value of cash flow will be $6,309.12
2) Net Present Value will be $(143,690.88)
3) Internal Rate of Return will be 0.042060793
Year 1 2 3 4 5 Total
Initial Investment $ 150,000.00

Sales per unit $ 2,250.00 $ 2,250.00 $ 2,250.00 $ 2,250.00 $ 2,250.00


Sales (units) 159.50 290.00 319.00 366.85 440.22
Sales $ 358,875.00 $ 652,500.00 $ 717,750.00 $ 825,412.50 $ 990,495.00
Variable cost per unit $ 1,390.00 $ 1,390.00 $ 1,417.80 $ 1,446.16 $ 1,475.08
Total Variable cost $ 221,705.00 $ 403,100.00 $ 452,278.20 $ 530,522.33 $ 649,359.33
Direct Fixed Cost $ 249,000.00 $ 249,000.00 $ 249,000.00 $ 249,000.00 $ 249,000.00
Cash Flow $ (111,830.00) $ 400.00 $ 16,471.80 $ 45,890.17 $ 92,135.67
Present Value (8%) 0.925925926 0.85733882 0.793832241 0.735029853 0.680583197
PV (Cash Flow) $ (103,546.30) $ 342.94 $ 13,075.85 $ 33,730.64 $ 62,705.99 $ 6,309.12
NPV $(143,690.88)
IRR 0.042060793
 The rate of return from the investment is less than the required rate of return,
this means that the investment is generating a return lower than the company’s
rate of return so this investment should be rejected. (Heisinger & Hoyle, n.d.).
 Our Net Present Value for this project is a negative ($143,690.88), and the
Internal Rate of Return is close to a negative as well. As such, our
recommendation to the manufacturing plant will be to abandon any intentions
of investing in the project.
 The IRR rule also states that if the IRR is greater than or equal to the
company’s required rate of return, the investment should be accepted
otherwise, the investment should be rejected. (Heisinger & Hoyle, n.d.).
 From our analysis, the IRR is less than 8%, meaning this investment should be
rejected.
 Factors that management should consider while deciding should include budget
for the project, stakeholders of the firm, supply, demand, price, etc.
 Difference in net income = $895,000 - $975,000
                                        = -$80,000 (reduction in net income)

The costing methodology used in this project was the job costing method which
records revenues and cost for each job that results in a unique product and since
this washing company deals with different unique products that require different
materials, this costing methodology is suitable.

Recommendation:
Washer dryer combo product line should be dropped as the analysis shows that
though sales revenue of $(80,000) will be lost, the company saves by eliminating
the variable cost, labor cost, and direct fixed cost when the W/D combo is
dropped.
References

 Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved


from 
https://2012books.lardbucket.org/books/accounting-for-managers/index.htm
l
 Luthor, J.(2019) What is a Contribution Margin Percent? Retrieved from
https://yourbusiness.azcentral.com/contribution-margin-percent-23360.html.