ACC 202 Module 4 Project Milestone Two example

Project Milestone Two: Break-Even, Target Profit and Three What-If Scenarios for a Composite Candle Maker

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Southern New Hampshire University

ACC 202: Managerial Accounting

Module Four Project Milestone Two

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[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Project Milestone Two: Break-Even, Target Profit and Three What-If Scenarios for a Composite Candle Maker

The Cost Formula

Milestone One established that Cedarline Candle Co., a composite small-batch candle maker, incurs fixed costs of 16,130 dollars a month and variable costs of 13.20 dollars per candle for any monthly volume between 1,500 and 2,500 candles, its relevant range. Candles sell for 24 dollars, so each leaves 10.80 dollars to cover fixed costs and then profit, and the contribution margin ratio is 45 percent. The company currently sells about 2,100 candles a month. Cost-volume-profit analysis uses these figures to answer the owner's planning questions: how many candles must be sold to avoid a loss, how many to reach a profit goal, and how much each proposed change would move the answer (Franklin et al., 2019).

Break-Even Point

Break-even in units is fixed costs divided by contribution margin per unit: 16,130 dollars divided by 10.80 dollars, or 1,493.5 candles. Since Cedarline cannot sell half a candle, it must sell 1,494 candles a month to cover its costs. Break-even in sales dollars is fixed costs divided by the contribution margin ratio, 16,130 divided by 0.45, or about 35,844 dollars, which is 1,493.5 candles at 24 dollars. At 1,494 candles, total contribution margin of 16,135 dollars just exceeds fixed costs, and profit is essentially zero.

The owner's intuition had been that the business breaks even at around 1,000 candles, because a candle sells for nearly twice what its materials cost. The analysis shows why that is wrong: materials are only part of variable cost, and piece pay, packaging, commission and utilities take another 4.40 dollars per candle before any fixed cost is covered.

Target Profit and Margin of Safety

The owner wants monthly profit of 6,000 dollars to fund a second melting station within a year. The volume needed is fixed costs plus target profit divided by contribution margin per unit: 22,130 dollars divided by 10.80 dollars, or 2,049.1 candles, so 2,050 candles a month. At the current 2,100 candles, profit is 2,100 times 10.80 dollars minus 16,130 dollars, or 6,550 dollars, just above the target.

The margin of safety is current sales minus break-even sales: 2,100 minus 1,494, or 606 candles, about 14,544 dollars of revenue, or 28.9 percent of sales. Cedarline can lose a little more than one sale in four before it stops making money, and it can lose only 50 candles a month before it misses the owner's target. That second number matters more for the expansion plan than the first.

Three Scenarios

The owner is weighing three possible changes. Table 1 shows each against the current plan, holding everything else constant.

Table 1

Cost-Volume-Profit Scenarios for Cedarline Candle Co., Monthly

Note. Composite figures. Break-even volumes are rounded up to whole candles. In Scenario B, commission rises to $1.30 because it is 5% of the higher price.

Interpreting the Scenarios

Scenario A is a risk rather than a choice. A 15 percent rise in wax prices adds about 0.47 dollars to each candle's variable cost, lowers contribution margin to 10.34 dollars, raises break-even by 67 candles and cuts monthly profit by about 976 dollars, taking Cedarline below its 6,000 dollar target. Because wax prices have risen twice in two years, this is a realistic threat.

Scenario B raises the price to 26 dollars. Even if volume falls 8 percent, to about 1,932 candles, profit rises to about 8,406 dollars, because each remaining candle contributes nearly two dollars more. The analysis also shows how much volume the price increase could lose before it stopped paying: at 12.70 dollars of contribution per candle, Cedarline would need only about 1,786 candles to match its current profit, so it could lose roughly 15 percent of volume and still come out even on the decision.

Scenario C shifts sales mix. Website sales carry no sales commission, so moving 40 percent of volume to the website raises average contribution margin to 11.28 dollars and profit to about 7,558 dollars. This scenario depends on marketing spending that is not yet in the fixed costs, and a website push costing more than about 1,000 dollars a month would erase its advantage.

When the Scenarios Arrive Together

Real conditions rarely change one factor at a time, so it is worth testing the combination the owner fears most: a wax price increase arriving just after a price rise. At 26 dollars with wax up 15 percent, each candle contributes about 12.24 dollars. Break-even rises only to about 1,319 candles, and at the reduced volume of 1,932 candles profit is roughly 7,508 dollars, still well above the 6,000 dollar target. By contrast, if wax rises and the price stays at 24 dollars, profit falls to about 5,574 dollars and the target is missed. The combined case strengthens the recommendation: the price increase is not only more profitable on its own terms, it is also the owner's best protection against the cost risk she cannot control. Monitoring both volume and wax cost each month, rather than waiting for the quarterly statements, will show quickly whether the assumptions behind these figures are holding.

Assumptions and Recommendation

Cost-volume-profit analysis rests on simplifying assumptions: costs are cleanly fixed or variable within the relevant range, price and variable cost per unit are constant, the sales mix is stable, and production equals sales (Datar & Rajan, 2021). Some costs treated as fixed, such as setups for custom orders, are really driven by activities and would rise if custom work grew (Kaplan & Anderson, 2004). Each scenario above changes only one factor at a time, and in practice they interact; a price increase and a wax increase could arrive together. Within those limits, the analysis supports a clear recommendation. Cedarline should test a price increase to 26 dollars on its standard line, starting with its own website, where customers are less price-sensitive, while tracking volume monthly against the 1,786-candle threshold. The higher margin would also protect the business against the wax price risk in Scenario A, since at 26 dollars a 15 percent wax increase would still leave profit above the owner's target.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 2: Managerial accounting. OpenStax. https://openstax.org/details/books/principles-managerial-accounting

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.