Contribution Margin and Breakeven Analysis

Essay by tiernyUniversity, Master'sA+, February 2006

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Aunt Connie's Cookies is a brand that is synonymous with delicious lemon crème and real mint cookies throughout the east and mid-west. Maria Villanueva, the grandniece of Connie Rochoa, is now the CEO of the family-owned business. She has appointed Team C as the COO. Team C will make decisions with a view to maximize the firm's contribution margin and operating profits.

Aunt Connie's Cookies was approached to produce a bulk order of 1 million packs of real mint cookies to be completed in one month's time. The company needed to decide if completing this order will be a good option. Maria stated that the total contribution margin and operating profit from the lemon créme cookies are less than the real mint cookies. She suggested that we reduce the current production volume for lemon créme and produce more real mint to accommodate the bulk order. In accepting the bulk order, Maria's suggestion should not be followed.

To maximize the operating product, it is better to produce more of the lemon créme cookies because it has a greater contribution margin per unit than the real mint. This meant that the current production of real mint cookies should be reduced.

The bulk order should not be considered when the cookie production for both types of cookies exceeds production capacity. This would mean that the company is incapable of completing the order. Also, Aunt Cookies should not consider accepting a bulk order if the asking sales price per unit for the order is at a price that would produce results where the contribution margin is less than the fixed costs. Although the contribution margin may still be greater than zero, it will still produce a loss for the company. Therefore, it would not be worth it to the company to fulfill the order.