Calculating Break-Even Sales Price and Profitability

The assignment discusses the breakeven analysis and outsourcing decision for a company. It calculates the minimum selling price in both short-run and long-run scenarios, considering variable costs and fixed costs. The company's main objective is to maximize its profit margin. In the short run, the break-even selling price formula is used to determine the minimum selling price, while in the long run, the total cost is variable, and the price is calculated by dividing the total expense by the total units. The outsourcing option is considered better for the company as it provides high efficiency. Ultimately, the decision to accept a long-term government contract or outsource the project depends on various factors, including profit margins, synergies, brand value, and potential risks.

Management Accounting

Introduction
In this present paper, we will discuss the monthly profit, factors which are considered at the time
of accepting the order, long term government contract offer, foreign market offer, outside
suppliers offer, and another outside offer from suppliers.
a. Monthly profit
The monthly profit is calculated by deducting the total cost from the total revenue of the
company within the particular period of time. The monthly profit determines the total
profitability of the company by deducting the total expense of the company with the total sales of
the company. The manufacturing costs include direct material, direct labor, variable overhead,
and fixed overhead (Harvey et al., 2013). The marketing costs include variable and fixed costs.
In which the fixed costs does not change by variation in the units produced within the particular
period of time. The total pen and pencil set produced in a month are 10,000, and all the units are
sold in the same month. The total profit percentage of the company is 6.67% of the total sales of
the company which shows that the company is not able to meet the breakeven point. The
monthly profit of the company is covering the total cost of the company which includes total
variable and total fixed cost within the particular time period.
Below table shows the calculations:
Particular Costs Unit Amount

Sales 7.5 10000 75000
Manufacturing
costs
Direct material 1 10000 10000
Direct labour 1.2 10000 12000
Variable overhead 0.8 10000 8000
Fixed overhead - - 10,000
Marketing costs
Variable costs 1.5 10000 15000
Fixed costs - - 15000
Total cost 70000
Total
profit
(Monthly
)
5000
Profit
percentag
e
6.67%

b. Factors to be considered at the time of accepting the order
The profit of the company after producing the additional units at 5.50 per unit is $5,800 which
shows that the company should accept the request offer because the company is able to meet the
total expense of the company by producing additional units of 2000 at 5.50 per unit. So the
company should accept the off request based on the profit. Yes, the off request should be
accepted based on the profit because the company firstly considers the profit is generating from
accepting the off request.
Other factors are also considered at the time of accepting the projects. Below are the factors:
1. Value of the offer
It is one of the most important factors which is considered after the profit of the company.
The value added by accepting the project is taken into account.
2. Benefits associated with offer
The benefits are considered at the time of accepting the project such as synergy, competitive
advantage and others which helps to build the brand image in the eyes of the customers (Mir
et al., 2014).
3. Brand value
It is considered at the time of accepting the project which improves the brand recognition and
identity. For example, the government contracts are generally accepted at lower profits
because the company considered the brand value improvement by accepting the project.
4. Long term profit
It is one of the most important factors which is considered at the time of accepting the project
because long term sustainability is impacted by acquiring the project.

5. Termination of project
The duration of the project is another factor which is impacted by accepting the project
because the short term projects are not deeply analyzed whereas the long-term projects are
analyzed in order to determine the impact of accepting the project.
Below table shows the calculations:
Particular Co
sts
Unit Amo
unt
Sales 7.5 10000 75000
Additional
sales
5.5 2000 11000
Manufactur
ing costs
Direct
material
1 12000 12000
Direct
labour
1.2 12000 14400
Variable
overhead
0.8 12000 9600

Fixed
overhead
- - 10,00
0
Marketing
costs
Variable
costs
1.5 12000 18000
Fixed costs - - 15000
Additional
costs
0.6 2000 1200
Total
cost
80200
Total
sales
86000
Total
profit
5800
Profit
percent
age
7.73
%

c. Long term government contract
It is defined as the agreement between the company and government institution which is made
for the specific period of time. The contract varies from prime contracts to large defense
contracts. The contract with the government helps to develop the goodwill of the company.
The company should accept the project because the first and foremost reason for accepting the
project is profit and after producing additional 5,000 pen and pencils at $4 per set because it is
the long term project and in the initial month the company have loss of $1,500 after deducting
one-time payment of $4,000 but after making the payment in the subsequent month the company
has the project of $2,500 which shows that the company must accept the project.
Following are the reasons for accepting the project:
1. Brand image
The acceptance of long-term government contract helps to improve the brand recognition and
awareness among the consumers and competitors among the competitors within the same
industry (Chou et al., 2015). It is one of the most important reasons for accepting the
government contract.
2. Value to the organization
The government long term contract adds value to the organization which helps to build the
brand image which enables to generate higher revenue within the particular period of time.
3. Synergy
The long term government contract adds value to the organization which is one of the
reasons for accepting the project.
4. Sustainable profit

The long term government contract provides long term sustainable profit to the company
which enables to sustain the growth of the company. It helps to accomplish the financial and
non-financial goals of the company within the specific time framework (ZHAO et al., 2016).
Below table shows the calculations:
Particular Costs Unit Amount
( 1
month)
Amount
(2
month )
Sales 7.5 10000 75000 75000
Government
contract
4 5000 20000 20000
Manufacturing
costs
Direct material 1 15000 15000 15000
Direct labour 1.2 15000 18000 18000
Variable
overhead
0.8 15000 12000 12000
Fixed overhead - - 10,000 10,000
One off payment 4,000 -

Marketing costs
Variable costs 1.5 15000 22500 22500
Fixed costs - - 15000 15,000
Total
revenue
95000 95000
Total cost 96500 92500
Total
profit
-1500 2500
d. Foreign market
It is defined as the market in which the foreign currencies are traded. The foreign exchange
market includes central banks, hedge funds, commercial company’s investment management
firms and others. The Forex market is considered as one of the largest financial markets in the
world. The Forex market provides currency conversion for the international trade. The foreign
market has unique characteristics which attract a large number of investors for investing and
generating higher profits (Kruesi et al., 2017). Following are the factors which are considered at
the time of calculating minimum selling price:

1. Variable costs
It is defined as the cost which varies with the number of units produced within the particular
period of time. It includes labor costs, manufacturing costs, and others.
2. Fixed costs
It is defined as the cost which remains fixed regardless of the change in the total units of
production.
3. Incremental costs
It is defined as the cost which occurs at the time of producing additional units than the fixed
costs increases which are considered at the time of calculating minimum selling price.
The breakeven selling price is calculated for determining the minimum selling price of
entering the foreign market (Palia et al., 2014). The formula for calculating the break-even
sales price is as follows:
Break even sales price =
Total fixed costs/
Volume of production
+ Variable cost per
unit
Thus the break-even sales price is 5.75 which show that the minimum price for entering into
the foreign market is 5.75.
Below table shows the calculations:

Short run
Variable cost per unit 4.5
Total fixed cost 25,000
Total volume of
production
20,000
Break even sales price Total fixed costs/
Volume of production
+ Variable cost per
unit
Step:1 1.25
Step :2 5.75
In the long run, the minimum price is equal to the total economic cost which ensures zero
economic profit in the long run. In the long run, all the cost are variable, and there are no fixed
costs. The price is calculated by dividing the total cost by total quantity. So the minimum price,
in the long run, is $4.5.
Below table shows the calculations:
Particular Costs Unit Amoun

t
Sales 7.5 20000 150000
Manufacturing costs
Direct material 1 20000 20000
Direct labour 1.2 20000 24000
Variable overhead 0.8 20000 16000
Marketing costs
Variable costs 1.5 20000 30000
Total
cost
90000
Total
profit
60000
M. Price 4.5

e. Outside suppliers
The company can accept the offer from outside supplier because the total profit which producing
in-house is $5,000 per month whereas the profit after accepting the offer from supplier is neither
profit nor loss but it is beneficial for the company to outsource because the total cost of
producing 10,000 sets of pen and pencils includes $45,000 variable cost and $25,000 fixed costs.
So by accepting the offer from outside suppliers, the profit margin of the company will increase
which helps to achieve the mission and vision of the company. It also helps to save variable cost
completely, and fixed cost of production is saved by $3,000. The marketing cost of the company
also saves by $0.40 per set which helps to expand its business by investing the profit of the
company in various business diversities. It also helps to provide economies of scale to the
business by producing high unit through reducing the total cost of production. There
The outsourcing of business process helps to provide a cost advantage, increase efficiency, helps
to focus on core areas, saves the infrastructure and technology, time zone advantage and others.
It helps the save the total cost of the company which is one of the most important aims of the
company in order to maximize the profitability of the company within the particular period of
time.
Below table shows the calculations:
Supplier

Variable cost 42000
Fixed costs 22000
Marketing cost(variable) 11000
Total cost 75000
Total profit 0
f. Offer from outside suppliers
In this case, the offer from outside suppliers should be accepted because after accepting the
proposal the total profit of the company is increased by $5,500 whereas the total profit earned in
outsourcing is 5,000 which show that the profit is higher at the time of outsourcing from outside
suppliers. The sources of income are increased which includes sales and rent received. The total
cost remains the same which includes variable cost, marketing variable cost, and fixed cost. The
total cost remains the same whereas the total profit of the company increases by $500 which
shows that the company should accept the project. The aim of the company is to maximize its
profit margin in order to diversify its business which helps to achieve the long-term goals and
objectives of the company. Secondly, the outsourcing helps to provide efficiency to the
company, and it enables to access the skilled resources which provide a competitive advantage to
the company. It helps to focus on the core areas of the business which enables to build brand
image in the eyes of the customers. It helps to add value to the company by providing the high