Accounting for Decision Making Essay Example | Topics and Well Written Essays - 1250 words - 1

Accounting for Decision Making - Essay Example Break-even level of sales = Break-even units*Selling Price (Keiso, 1999) = 148148.15*170 = $25,185,185 Strategy #2 Fixed Cost = $25,000,000 Selling Price = $200 Variable Cost = $35 Break-even level of output = = = 151,515 units Break-even level of sales = Break-even units*Selling Price = 151515.15*200 = $30,303,030 Desired Target of Profitability The company's desired profitability target is $4 million. According to the break-even level of sales, the company must exceed the above revenue levels according to both strategies in order to be able to make profits. If the output levels, as given in the table, are taken into consideration for calculation of optimal revenue which exceeds breakeven and offers the firm with its target profitability level, the following table would provide the relevant answers to base our analysis with. Strategy 1 Â   Selling Price = $170 Estimated demand (units) Estimated Revenue ($) Profit ($) 150,000 $25,500,000 $314,815 180,000 $30,600,000 $5,414,815 200,0 00 $34,000,000 $8,814,815 Hence, if the company undertakes strategy 1, as can be seen in the table above, output levels of above 180,000 units would allow the firm to fulfill and exceed its target profitability level. This range of output also fulfills the break-even level of output therefore the firm is satisfying its desired profitability level. (Keiso, 1999) ... This level of output also has the highest probability of consumer demand levels hence the firm will benefit from undertaking this level of production and fulfilling its profitability targets. (Keiso, 1999) Margin of Safety Margin of Safety: Budgeted/Actual Sales - Breakeven Sales (Keiso, 1999) Margin of Safety (%) : MOS/(Budgeted/Actual Sales) (Keiso, 1999) Strategy 1 Â   Â   Estimated demand (units) Breakeven Sales (units) Margin of Safety (units) Margin of Safety (%) 150,000 148,148.15 1,852 1.23% 180,000 148,148.15 31,852 17.70% 200,000 148,148.15 51,852 25.93% Strategy 2 Â   Â   Estimated demand (units) Breakeven Sales (units) Margin of Safety (units) Margin of Safety (%) 150,000 151515.15 -1,515 -1.01% 180,000 151515.15 28,485 15.82% 200,000 151515.15 48,485 24.24% As stated above, the margin of safety can be expressed in either units or a percentage of the total estimated sales. These figures are important for key decision making for managers because it shows the extent by which the projected sales exceed the break-even sales. The margin of safety is an important measure of risk as it shows the amount of sales which a firm can afford to vary without incurring a loss. The higher the number, the more beneficial it is for the firm since the company would be able to withstand fluctuations in sales. A drop in the levels of sales, lower than the margin of safety would alarm the management since it would cause losses for that particular period for the firm. (Keiso, 1999) Decision The decision of whether the company should go ahead with the new product should include many other ratio and cash flow analysis and evaluations so that the management, even though they cannot avoid any risks, are able to come up with more suitable decisions. However, based