Break-Even and Contribution Margin Analysis
Stocking Durango boots, Sally Brown earns a contribution margin ratio of 40% which is relatively higher as compared to other competing companies within the industry which have an average of 35%. Hence she should continue stocking Durango boots because she has a higher contribution margin which covers all the cost and allows her to make some profit.
Sally brown should consider the following factors which have the potential to change her analysis.
- Market demand; it is one of the factors which must be considered because of the anticipated revenues and the projected cost of running the business since the higher the volume of sales the soon the business will cover its sales.
- Variable and fixed costs; this is cost associated with the daily business operation. High fixed costs will delay breakeven. Likewise, high variable costs mean that the business will sell large volumes of goods to earn sufficient revenue to cover all fixed costs and the initial startup capital.
Her assumption during the analysis;
- She assumes that all the cost are classified in either fixed or variable cost
- During the analysis, the product price is assumed to be constant
- All revenues and cost remain linear
The HR is important especially in keeping cost related data which is important during the company’s break-even analysis. This is important in the explanation of differences between costs and revenues via highlighting changes occurring between fixed and variable costs, product prices, returns and how they affect profits. It is an important tool used during partial company budgeting since it shows the lowest point at which the business can carry on the activity without making losses.
Careful analysis of cost data available to the HR managers is important especially in running the business operation. HR managers form the pillar in which major managerial decisions in an organization are made. That is staffing, training, and employment. Since one of the major challenges facing organization is cost management, HR has a role to advise the organization on where to cut their cost without influencing employee’s motivation.