The break-even point tells a company the number of units or theamount of revenue that it must sell or earn in order to pay for allof its costs. At this point, the company has neither profit norloss.

Companies have two main types of costs: variable costs and fixedcosts.

Variable costs are those costs that vary with the number ofunits produced. Examples of variable costs are direct labor, directmaterials and overhead.

Fixed costs are those costs that a company incurs that do notdepend on production. For example, most selling, and alladministrative costs are fixed. A company must pay these costs evenif it does not have any production activity.

The formulas for computing break-even follow:

B/E _{(# units)} = .     FixedCost             .

                        Contribution Margin

B/E _(Revenue) = .     FixedCost             .

                    Contribution Margin Ratio

If you will notice, both formulas use something calledContribution Margin. Contribution Margin represents the amount ofrevenue available after all variable costs have been paid for. Itrepresents what is left over to pay for the fixed costs. TheContribution Margin ratio is the percentage Revenue that theContribution Margin represents. In concept this is similar to GrossProfit.

In Cost Accounting Variable Costs are grouped together, andFixed Costs are grouped together to create a variation of thetraditional Income Statement. This variation is called aContribution Margin Income Statement.

Read the following ethical dilemma.

Spillproof Company produces molded plastic cup holders forautomobiles. Below is a summary of its Contribution Margin IncomeStatement from last year:

• Revenues: $5,750,000
• Variable costs: $3,850,000
• Fixed costs: $2,000,000
• Net Loss: ($100,000)

Because the company’s CEO is very concerned about the firm’s netlosses, she asks the production manager if there are any ways inwhich they can reduce costs.

A few weeks later, the production manager returns with aproposal to reduce variable costs to 53% of revenues by loweringthe cost estimates that the company uses for environmental clean-upcosts. Some years the company has to perform waste clean-up andother years it does not. Either way, the company records thisestimated cost as part of Variable Cost since it is based on thenumber of units produced.

The CEO likes the new projected net income and new break-evenpoint, but is concerned that this change in the estimate willmisrepresent the potential liability. The manager disagrees. Hefeels that the company will not be violating any laws by changingtheir estimate, and that there is only apossibility of environmental costs in thefuture anyway.

Requirements for your Main thread post:

1. Calculate the CURRENT breakeven revenues usingthe current Contribution Margin Income Statement informationabove.  Show us your work!
2. Re-calculate the breakeven revenues if variable costs are 53%of revenues.  Show us your work!
3. Calculate Spillproof’s projected NetIncome/Loss.   Show us yourwork!
4. Discuss the following:

• 1. What are the ethical issues involved in this case? Explain youranswer.
  2. Do you feel that the Production Manager is acting improperly orimmorally? Why or why not? Please explain your response.
  3. What stakeholders would be affected if the CEO implemented theProduction Managers suggestions? Why?
  4. What should the CEO do?