Break-even Point Analysis of Drum Brae Accessories Limited

The case explains about Drum Brae Accessories Limited which makes three types of screen protectors for the phones. The company has different associated cost, demand and sales price of the products. In the case, the BEP analysis method has been applied on the business to measure the performance of the business and the profitability level of the business.

The company’s breakeven point is 753261 units and the total BEP sales amount of the company is £1,129,891.30. The calculations have been given in the above table. It explains that the £1,35,0000. It explains that in case of composite BEP level of the business, the company is able to generate the profits because £ 2,20,108 is the margin of safety sales of the business.

The contribution margin and BEP amount of each of the product of the company has been measured and it has been found that the contribution and BEP of each of the product is different than other. In case of SPG, it has been found that the contribution per unit is £ 0.18 and the BEP amount of the product is £ 4,18,4478.26. Further, in case of PTP, it has been found that the contribution per unit is £ 0.20 and the BEP amount of the product £ 3,76,630 (Toomey, 2012).

Lastly, the case evaluation on the RP explains that the Contribution margin per share and BEP level of the business is £ 0.13 and £ 3,34,783.

The overall profitability analysis of business would be zero if the company would be able to sell only the break even units of the business. As at the level of the break even units, the company only generate that much revenue which could cover the overall expenses of the business. If the company sells more unit than the break even units then the company would be able to generate the profits (Sweeney, 2013).  

The management of the company has argued that the fixed cost of the business must be divided among the products on the basis of their sales units. Though, the fixed cost must be common after deducting all the extra fixed cost of each of the product. On the basis of the calculations, it has been found that the BEP, contribution per margin etc of each of the product would be changed in this case.

In case of SPG, it has been found that the contribution per unit is £ 0.80 and the BEP amount of the product is £ 2,12,153 which used to be £ 0.8 and £ 4,18,478 earlier. Further, in case of PTP, it has been found that the contribution per unit is £ 0.60 and the BEP amount of the product £ 3,83,333 which used to be £ 0.2 and £ 376,630 earlier.

Contribution Margin and BEP Analysis of Each Product

Lastly, the case evaluation on the RP explains that the Contribution margin per share and BEP level of the business is £ 0.30 and £ 5,45,926 which used to be £ 0.13 and £ 3,34,783 earlier. It explains that the huge changes have taken place because of the different distribution among the fixed cost of the business (Lysons and Farrington, 2012).

On the basis of the BEP sales level of each of the product, it has been measured that the break even units of each of the product is different. In case of SPG, it has been found that the BEP units is 84,861 units  and the BEP amount of the product is £ 2,12,153 whereas the sales units of the products are 2,00,000. Further, in case of PTP, it has been found that the BEP units are 2,55,556 and the BEP amount of the product £ 3,83, 333 whereas the sales units of the products are 3,00,000.

Lastly, the case evaluation on the RP explains that break even units and BEP level of the business is 5,45,926 and £ 5,45,926 whereas the sales units of the products are 5,00,000. It explains that in case of SPG and PTP, the break even units are lower than the sales units of the company whereas in case of RP, the break even units are higher than the sales units of the business which explains that the RP production must be discounted by the business and the business must focus on the SPG and PTP products in order to improve the profitability level of the business (Hussey, 2007).

In case of discounting the RP production from the company, the profitability level of the business would be improved and it would lead to the business towards better performance in the market. The case explains that the level of fixed cost would also be reduced from the business along with the discounting of RP.

On the basis of the study on part e, it has been measured that the RP production line must be eliminated from the business in order to improve the profitability position of the business. The case explains that if the RP production would be eliminated than the fixed cost of the business would be £ 3,15,000 which would make the changes into the composite BEP level and the profitability position of the business. The study explains that along with the changes in the production process of the business, the composite BEP level of the business has become 4,62,235 units which have been divided among the SPG and PTP (Drury, 2013).

Impact of Fixed Cost Allocation on BEP and Contribution Margin

After the evaluation on different BEP of each of the product, total profitability amount of the company has been recognized and it has been found that after the elimination of the RP production line, the profit of the business would be £ 25,000.

1. Marketing manager’s target:

On the basis of the overall study on the company, it has been measured that it is important for the marketing manager of the company to make the changes into their target as currently, the BEP level of the business is even higher than the sales unit of the business which lead to the business towards the loss position. In case of SPG and PTP, the sales target of the business is quite better but n terms of the RP, it has been found that the break even unit of the business is 5,45,926 whereas the sales unit of the business are 4,00,000 (Weygandt, Kimmel and Kieso, 2015).

It explains that the marketing team of the company must focus on the RP products and must improve the sales of the business in order to cover all the associated expense with the production of the company and improve the profitability level of the business. If the sales target of the business would be changed than company would not be required to eliminated the production process of the business.

1. Suitability of operational manager:

The operational manager of the company has argued that the fixed cost of the business must be divided among the products on the basis of their sales units. Though, the fixed cost must be common after deducting all the extra fixed cost of each of the product. This is not a proper allocation method in order to reach over a better conclusion about the performance of the business. the fixed cost of a business never depends on the sales units of the business or the specific product line and thus the allocation of the resources on the sales unit basis lead to the worst outcome and worst decisions of the company (Kaplan and Anderson, 2013).

An operational manager is required to measure the different fixed cost of the business and must be allocate the fixed cost on the basis of their activity. Such as, in this case, the rent of the building is £ 5000 and the building’s floss space is 500 square feet out of which 100 sq feet is used by SPG, 200 by PTP and rest 200 by RP than the fixed cost of each of the product line would be £ 1000, £ 2000 and £ 2000 (Garrison, Noreen, Brewer and McGowan, 2010).

On the basis of the overall study on the production process and the sales target of the business, it has been found that the sales target of the business must be changed in terms of the RP sales units. In that case, the company would not be required to eliminate the production process of the RP products in the business and the profitability level of the business would be improved. Further, it has also been measured that the fixed cost must not be divided on the basis of the sales unit of products because it is not a proper fixed cost allocation method. The fixed cost per sales unit could occur different result and manipulate the overall results of the business. To conclude, few changes into the production process, operational changes and the sales target of the company would improve the overall profitability level of the business.

References:

DRURY, C. M. 2013. Management and cost accounting. Springer.

Garrison, R. H., Noreen, E. W., Brewer, P. C., and McGowan, A. 2010. Managerial accounting. Issues in Accounting Education, 25(4), 792-793.

Hussey, D.E., 2007. Strategic Management: From Theory to Implementation, UK: Taylor and Francis

Kaplan, R., and Anderson, S. R. 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Lysons, K. and Farrington, B. 2012. Purchasing and supply chain management, Harlow, Essex: Pearson Financial Times

Sweeney, E 2013. The people dimension in logistics and supply chain management – its role and importance, Supply Chain Management: Perspectives. Issues and Cases. McGraw-Hill: Milan, pp. 73-82.

Toomey, J., 2012. Inventory Management: Principles, Concepts and Techniques, Germany: Springer Science and Business Media

Weygandt, J. J., Kimmel, P. D., and Kieso, D. E. 2015. Financial & Managerial Accounting. John Wiley & Sons.