Essay Grade

Break-Even and Contribution Margin Analysis
Break-even and contribution margin analysis is an important technique in evaluating and planning for the
financial needs of an organization. It is necessary to understand break-even analysis in order to better
estimate whether funds may become available to HR managers for initiatives aimed at staffing,
developing and rewarding employees. The analysis filters throughout the organization and allows
managers to determine quantified answers to questions about selling volume, price, profits, and other key
business components, including investments in human resource assets.
For this Application, you will have the opportunity to use these techniques to aid in decision making for
the Great Western Outfitters. You will use the information in this week’s Resources about contribution
margin and break-even analysis to make projections and recommendations for the future of this
organization.
You will set up and use an Excel spreadsheet for all your calculations to complete Problems 1 through 6
below. The spreadsheet you develop should be what you turn in for the Application. Note: The Resources
section includes tutorials for those who might need help in designing and using an Excel spreadsheet.
These resources are also an excellent refresher for experienced Excel users.
Great Western Outfitters
Complete Problems 1–6
1. The boot department of the Great Western Outfitters store is preparing to set sales goals for the upcoming
year. Sally Brown, the department manager, is trying to determine what brands of boots to retain as part
of the sales inventory. In particular, she is wondering about the value of continuing to sell Durango Boots.
Going through past records, she retrieves the following information about the sales of Durango boots and
asks you to help her with some calculations:
Total Sales (1,000 pairs of boots) $500,000
o
o
Variable Costs
$300,000
Fixed Costs
$150,000
Tax Rate
25%
Based on this information:
Compute the Contribution Margin (CM), unit CM, and CM ratio. IN order to earn full credit for your
work, plese remember to include detailed step by step calculations with your response.
If the average CM ratio for other brands is 35%, should Brown keep stocking Durango Boots? Why or
Why not? Provide a rationale that demonstrates your understanding of how the technique is applied in
practice.
2. Sally Brown discovers that the owner of Great Western Outfitters is a big fan of Durango Boots and
wants to continue selling them. As Sally prepares to order the boots for next year, she needs to determine
how many pairs of boots (a pair of boots is one unit) she needs to sell to break even.
o
Based on the Table from Problem 1:
Help Sally compute the break-even point in units and in dollars.
What if any factors might she consider which have the potential to change her analysis and/or the
assumptions underlying her analysis?
3. Sally feels strongly that if they are going to carry Durango Boots that they need to do more than just break
even.
Based on the Table from Problem 1:
o How many pairs of boots (units) would the boot department need to sell to obtain a profit of
$100,000?
o How many pairs of boots (units) would the company have to sell to obtain an after tax income of
$120,000?
o What assumptions were essential to the accuracy of her results and to the analysis and conclusions
drawn? Discuss what role HR data might play in arriving at these calculations. How do HR data
impact decisions on sales volume and operational results?
4. Sally Brown is flipping through a popular magazine and sees a photo spread of Garth Brooks, the country
singing legend. Prominently on display is his collection of Durango Boots. Because of this, Sally is
certain that the store can expect to sell 250 extra pairs of boots.
Based on the Table from Problem 1:
o How much will income increase if the sales go up by 250 units? (You can ignore taxes for this
problem.)
o How much will income increase if the store expects sales to go up by $25,000? (ignoring taxes).
5. The top three selling brands of boots at the Great Western Outfitters store are Double-H boots, Durango
boots, and Stetson boots.
For the last quarter, sales were as follows:
Double-H Boots Durango Boots Stetson Boots
Sales
$400,000
$500,000
$875,000
Variable Costs $250,000
$300,000
$625,000
Total fixed costs were $507,000.
o
o
o
Using these figures:
Determine the sales mix, CM by product and in total, the CM ratio by product and in total, and the net
income (ignore taxes).
Calculate the break-even point in dollars in total and by product.
Prepare a chart, such as example 12 on page 67, to help you with your answer. Use three decimal places
for the percentages. For example, .275 would be 27.5%
6. Sally Brown is concerned about the sales numbers for Double-H Boots.
o
Based on the Table from Problem 5:
What is the margin of safety if the company projects sales at $400,000 and the break-even point is
$250,000?
As the HR Manager for several stores, variable and fixed costs include HR components. As an HR
professional, having reviewed the analysis, what feedback do you have about the information from an HR
perspective? How might this information be valuable to your role in hiring, rewarding and developing
sales associates?

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