Break Even Analysis

Breakeven Analysis

The Guillermo Furniture Store has to make some very sound decisions based on the company’s latest performance numbers. The first two quarters of the year ended with the company facing a net loss as a result of inaccurate forecasting. Correcting this problem is altering the product mix is an estimate that is achievable. Tweaking will capitalize on the surprisingly exuberant sales of the mid-grade product. Favoring the mid-grade product will first increase sales and profit while simultaneously decrease variable costs related to the manufacture of the high-grade product. This will result in a higher contribution margin for each product therefore becoming the definitive adjustment that will eventually improve the poor sales results.

As briefly observed above, one of the most important aspects of the overall CVP or Cost Volume Profit relationship is the measure of the product contribution margin. The contribution margin is the difference between the product’s price and the variable cost (Homogren, 2008). It is the individual’s profit percentage that a product contributes to the overall profitability of the company. The variable cost involved with production and generates clear profits which will improve the bottom line. In the example of the Guillermo Furniture Store, we can view the contribution margin from the perspective of its individual products. The price for the high grade is $879.00 minus its associated variable cost of $700.00 results in a contribution margin of $179.00. The attached table will reveal the contribution margin in the same manner for the mid-grade with a CM of $69.00 finally the Flame Retardant product with a CM of $8.00.

This is a seemingly minor alteration in the product mix but has a significant impact on overall sales. This will be welcome news for Guillermo and ultimately help him to accomplish some of the goals he’d originally established for both himself and his company. This estimation is achievable...