Now the application of cost accounting system came into practices for the fact that that the firm had to come up with a decision i.e. whether to accept this order or otherwise, since bulk orders go for discounted prices, but the exceptional quantity makes the fixed cost distribute over larger volumes.
Number cracking leads to the conclusion that the contribution margin and operating profits from lemon cookies are lesser when compared to the real mint ones. So the suggestion came out was to reduce the volume of lemon ones and increase those of real mint, as it would also accommodate the order.
In realistic terms, the application should be otherwise, since the unit contribution margin for lemon cookies is on the higher side. At the same time, any order cannot be accepted at a point in time when production capacity is already on maximum utilization point, since it implies the inability of the firm to cater to the order. Along the similar line, the order should not also be considered because the selling price per unit for the bulk order is the one at which contribution margin is less than the fixed costs incurred so it makes less sense to accept the order under such a circumstance despite the fact that the contribution margin would yet be greater than zero, but would result in a loss for the business. Subsequently, it doesn't turn out to be worth for fulfilling the order.
Some more facts reveal that the break-even point for the lemon cookies is around 563,000 packs. The current manufacturing is around 600,000 packs, which turns the cycle into a profitable one, as it goes beyond the breakeven, and this manufacturing is around the same marks as the production requirements and monthly targets. However, increasing the break-even volume to 650,000, would not be profitable, despite the firm bring in operating profits. Though in doing this, the existing unit may be forced to reduce its volumes for lemon cookies, as the variable cost per unit for lemon is on the higher side.
These were some outcome from the simulation conducted, however, the three major learning points were the taking up of key figures of fixed costs, variable costs and breakeven point. These are the major constituents of cost for running a business. Majority of the costs are easily observable and thus, can be quantified to ensure that their relationship with the level of output can be determined in direct form or otherwise (Costs, 2005, para. 1 and 2).
Fixed and Variable costs are the basic bifurcation or classification of costs in a business, while break-even point determines the zero profit/loss levels and beyond this point, is all the profit a firm earns from its operations. Fixed costs remain same irrespective of the volume of output, while variable costs vary with the level of output produced (Marshall, McManus and Viele, 2004, pg. 417). There is another category of costing referred to as mixed cost, and this is a form that contains elements of both fixed and variable costs. The most classical examples are bills that contain a line rent (fixed part) and a unit based rental (variable part).
The analyses of all these costs are done