University Of the People
Managerial Accounting - BUS 5110-01
Written Assignment - Unit 3
Dr. Seval Ozbalci
April 26, 2023
Introduction
The requirement of this task is to calculate and describe the contribution margin and break-even
ratio for year 1 and year 2. Also, to determine the number of flights needed to make a profit of
$10,000 in year 3, and finally proposes to the bank if he should provide a loan to his Parasailing
Company. is needed.
Selling price per unit = $175
Monthly Fixed costs = Estimated loan payment per month $350 + Full-time scheduler salary
$2,500 per month + $500 per month dock fee and use of a small office on a pier = $3,350
Variable costs per unit = Fuel costs per flight $100 + Boat crew per flight $30 = $130
Year 1:
Contribution Margin = Selling Price – Variable Cost
= 175 – 130
= $45
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
= 45÷175
= 0.25714
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
= 45÷175 Duplicate?
= 0.25714
Break-even quantity = Total Fixed Costs ÷ Contribution Margin per unit
= (3350×12) ÷ 45
= 40200 ÷ 45
= 893
Break-even quantity = Total Fixed Costs ÷ Contribution Margin per unit Duplicate?
= (3350×12) ÷ 45
= 40200 ÷ 45
= 893
To break even in the first year, the company has to fly 893 times:
A unit's breakeven point is calculated by dividing the total fixed cost by the contribution margin
per unit as shown in the calculation above. As mentioned above, the monthly fixed cost is
R3,350, so the total fixed cost for a year is calculated by multiplying the fixed cost per month by
12. (Number of months in a year). As mentioned above, the contribution margin per unit is
calculated by subtracting the variable cost per unit from the selling price per unit.
Year 2:
Referrals = 2% of Selling Price = 175x2%
= $3.50 per flight
Contribution Margin Ratio = (Selling Price – Variable Cost) ÷ Selling Price
= (175 – [130+3.5]) ÷ 175
= (175 – 133.5) ÷ 175
= 41.5 ÷ 175
= 0.23714
Break-even quantity = Total Fixed Costs ÷ Contribution Margin per unit
= (3350×12) ÷ 41.5
= 40200 ÷ 41.5
= 969
To break even in the second year, the company has to fly 969 times:
Break-even sales = Total Fixed Costs ÷ Contribution Margin ratio
= (3350×12) ÷ 0.23714
= 40200 ÷ 0.23714
= $169,520
To break even in the second year, the company needs to make $169,520:
Contribution Margin:
It is the contribution margin per item divided by the selling price per item, as shown in the
calculation above. As mentioned earlier, the unit contribution margin is calculated as the
difference between the selling price and the variable cost. Due to travel costs, the variable cost
value varies from $130 in year 1 to $133.50 in year 2. The agency commission is 2% of the
selling price stated in the question. Dividing the total fixed costs by the contribution margin per
unit gives the break-even quantity, and dividing the total fixed costs by the contribution margin
ratio gives the break-even sales revenue.
Year 3:
Targeted Income in units = (Fixed costs + Target Income) ÷ Contribution Margin per unit
= (40200 + 10000) ÷ 41.5
= 50200 ÷ 41.5
= 1,210 flights
To achieve a $10,000 profit in the third year, the corporation needs to fly 1,210 times.
“After deducting variable costs from sales, contribution margin is a measure of what remains.
The difference is fixed costs and earnings that help cover the profit” (Guinn, 2020). In other
words, variable costs that vary with the level of production are subtracted from the sales when
calculating the contribution margin (what a company gets from selling the product). The result is
the contribution margin, which is the amount subtracted from fixed costs (costs that remain
constant regardless of production volume). As a result, contribution margins help a company
determine which products are profitable or not, allowing it to decide whether to add or remove
products from its portfolio. The price can be adjusted accordingly.
Based on this data, some assumptions are made. On the one hand, sales prices and costs remain
constant for three years. This means that inflation is not taken into consideration and seasonality
is not considered. Also, the data does not include bulk order discounts. All of this makes the
calculated results implausible. Since the loan amount and repayment terms are not fixed, we do
not know the cost or repayment period of the loan. If fees have already been paid in year 3, the
target revenue calculation will be revised due to the reduction in fixed costs. In this case, the
break-even quantity and amount are also changed.
Recommendations:
According to the numbers above, it's easy to secure 893 flights, so the company will break even
in the first year, so it's a good idea to allow the bank to finance it, because it is guaranteed. It also
has a positive contribution margin. This shows that if it gets a loan, the bank will invest
successfully.
Conclusion:
Finally, the cost-volume-benefit assessment helps companies run their business and as
demonstrated in this case study, helps companies raise funds to expand their operations.
Although limited, it can help a business by providing the data you need for pricing and costing.
References:
Guinn, J. (2022, May 18). What Contribution Margin Means to Your Business. The Blueprint.
Retrieved from: https://www.fool.com/the-blueprint/contribution-margin/
Chron Contributor (2021, March 8). Advantages or Disadvantages of Contribution Margin
Analysis. Retrieved from: https://smallbusiness.chron.com/advantages-disadvantages-
contribution-margin-analysis-65329.html
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from:
https://2012books.lardbucket.org/books/accounting-for-managers/s10-how-is-cost-volume-
profit-anal.html
