Accounting Transactions 1
Simulation Week 1 – Fundamentals of Financial Statements
Jerry Kennedy
ACT/529
Lewis Worcester
January 10, 2005
Accounting Transactions 2
Aunt Connie’s Cookies
TO: Maria Villanueva, CEO
FROM: Jerry Kennedy, Accounting Student
DATE: February 7, 2005
SUBJECT: Contribution Margin and Breakeven Analysis – Aunt Connie’s Cookies
Introduction
Even in a small operation such as Aunt Connie’s, concepts such as contribution margin and
breakeven analysis are relevant.
Contribution Margin
A cost accounting concept calculated as total revenue from a product or service less the total
variable cost. (Investopeida, 2005) Variable costs for Aunt Connies’s would be items such as
ingredients for the cookies. As production increases, the total cost of ingredients increases. Rent on the
building on the other hand is a fixed cost and does not increase at any production level.
Breakeven Analysis
Break-even analysis is a technique widely used by production management and management
accountants. It is based on categorising production costs between those which are "variable" (costs that
change when the production output changes) and those that are "fixed" (costs not directly related to the
volume of production). (tutor2u)
The break-even point is a key element to the break-even analysis. It provides managers the
information as to where income is equal to the sum of the variable and fixed costs. It is at this point that
a company overcomes this equilibrium and can begin gaining margins at each added unit of production
(See Figure I).
As was demonstrated in the simulation, taking production away from a product line with
greater contribution margins does not provide the optimal mix. While gains were realized, they were
less per unit since the lemon cookies had the greater contribution margin.
These tools are critical to managers that are wishing to shift production, expand facilities,
terminate or introduce a new production line. It is not enough to know what the contribution margin is,
the break-even point is the point of change where the margins increase. Comparing charts of multiple
products exposes the behavior in a manner that can advance production in an optimal fashion.
Accounting Transactions 3
The size of the business, the nature of the product or service is not relevant. Even cookie
production and sales can benefit from these powerful tools.
Figure I: Contribution Margin/Breakeven Graph
Source: http://www.tutor2u.net/business/production/break_even.htm
Accounting Transactions 4
References
Investopedia, (2005). Receivable turnover ratio. Retrieved January 5, 2005, from
http://www.investopedia.com/terms/r/receivableturnoverratio.asp
Marshall, D., McManus, W., & Viele, D. (2003). Accounting: what the numbers mean. (6th ed.).
New York: McGraw Hill Companies.
tutor2u. (2005). Introduction to break even analysis. Retrieved January 5, 2005 from
http://www.tutor2u.net/business/production/break_even.htm