3 accounting questions

Please see attached. 

The data for this analysis has been taken from Proctor & Gamble’s 2012 annual reports, which show that the company made an operating profit of $13292 million. The contribution margin for the company has been found to be 49 percent and this information will help the company in achieving next year’s target sales of $97953 million with a growth rate of 17 percent (Yahoo Finance, 2013). By using the same information, the breakeven point can be found as specified in the case study. If the company has enough resources to produce enough products so as not to lower the overall contribution margin then all the products must be produced. If it is found that the company has lower resources for even one product, then that product must be dropped so as not to lower the contribution level for all the products. In the analysis of the tables given in the case study we see that if any product has low contribution level then it must be dropped to keep the high contribution level of all the products of the company intact. The term of contribution margin is very important to decipher the breakeven point and take important decisions of the firm whether to produce certain goods or to drop it (Contribution Margin, (n.d)).

 

 Figures in millions of $

2012

Sales

83680

Cost of goods sold

42391

Contribution Margin

41289

Less operating expenses

27997

Operating profit

13292

 

References

Contribution Margin (n.d).  Retrieved on November 16, 2013, from http://www.investopedia.com/terms/c/contributionmargin.asp

Yahoo Finance (2013).  P&G Income Statement. Retrieved on November 16, 2013, from http://

finance.yahoo.com

2 Question’s

1)

For companies like this, there is a huge amount of fixed assets to maintain and depreciate.  How does that fact impact the breakeven?

2)

What constitutes important to keep/or drop a product?

Your friend remarked, “A company will never drop a product from its product line that has a positive contribution margin. It will want to garner every bit of profit that it can.” Is this true in all cases? What are the risks and benefits of evaluating product continuation or implementation using the contribution margin?

1)

Regarding the solution below. The contribution margin mainly looks at the variable costs.  What potential problems could result from the product’s associated fixed costs?

In this case it is important to evaluate what the friend means by positive contribution as it can be lower and higher. It is important for the firm to have an overall high product contribution in order to maintain a high profit level. The contribution levels for all products must be analysed in order to calculate the contribution of each of the products to the overall profit level (Contribution Margin, (n.d)). Hence in these examples given above we see that if any product has a positive but low contribution, then that specific product must be dropped from production the respective year due to the lack of resources so that it does not dilute the high contribution level of other products and ultimately the overall contribution level. Hence the resources for each product is very important when it comes to the decision of dropping a product based on its contribution level as a product will have low contribution if the resources for the same are low. The risk of using such an analysis is that we lose out on unanticipated increase in demand of the product that is dropped. The benefit of this analysis is that we know which products to drop in order to maintain a high profit level for all the products that are produced by the company.