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Concerned about the future of the company, a small business owner hired as a cost management consultant.  Her company has “a chain of small local operations that support larger caters of special events.” The key issue at hand is that in this particular industry, competition is steep. The client wants to know just how low she could reduce prices without losing money. In any competitive industry, business owners need to strive to obtain a competitive advantage in order to remain relevant but since the key objective of a running a business is to generate profit. Whatever strategy a manager adopts for his company should not result in a loss. The worse case scenario should be to break even. Breaking even means returning a (gross) profit of $0 and loss of $0 simultaneous (Holtzman, 2013). Any revenue generated above the break-even point will result in a profit. In order to determine the break-even point for this business, I will use the financial data provided by the client to conduct a Cost Volume Profit (CVP) Analysis.
CVP is a managerial accounting tool that is used to explore the relationship between sales volume, cost of production and profit to assist managers with planning and decision making (Jones, Atkinson, & Lorenz, 2012). Effectively, the technique allows managers to explore how changes in one element will impact another. Before delving into CVP calculations, I will begin my analysis by listing and grouping the companies expenses into fixed and variable components and then calculate the total costs of providing service per event. It very important for accountants to spot cost into the categories of fixed and variable costs because these costs behave differently with production activity and they each have a different impact on gross profit (Holtzman, 2013). Managers can leverage this information to improve productivity of their business processes and increase gross margin (Holtzman, 2013).
 Fixed costs remain constant while activity increases or decreases (Heisinger & Hoyle, 2012) but only up to a point  (Holtzman, 2013), therefore managers should maximise the use of their fixed cost investments. Another way to use fixed costs is to reduce fixed costs as much as possible by outsourcing labor and services  (Holtzman, 2013). The fixed costs for this company are annual allocated costs of tents and other structures, annual allocated costs of trucks and vehicles, annual costs related to maintaining permanent staff. Total fixed costs respectively is equal to $500,000 + $2,000,000 + $3,500,000 = $6,000,000. This total remains the same regardless of how many events the company caters for during a given year. 
The variable costs are those costs that fluctuate with the level of production activity (Heisinger & Hoyle, 2012). The company’s variable costs include Floral costs, table arrangements, soft drinks, children snacks, and Wage for temporary staff. Total variable costs per event is $200 + $100 + $500 +$1,800 = $2,600. In order to determine the total variable expense, we need to multiply this by the total number of events that the company caters for. The company provided revenue data for a total of 5,000 events which they have serviced. The total variable cost for 5,000 I will multiply this by $2,6000 and the result is $13,000000.
So far we have estimated the variable costs associated with servicing 5000 events and we know that $22,500,000 was generated from these events. We can use this information to calculate the contribution margin. Contribution margin gives an indication of how much revenue from each sale is available to cover fixed expenses after accounting from for variable costs (Heisinger & Hoyle, 2012). Therefore, we deduct the total variable cost from total revenue to determine the contribution margin (Holtzman, 2013). We get $22,500,000 – $13,000000 which is equal to $9,500,000. 
Now, unfortunately, we have not been told specifically for what period the revenue was generated. Whether it was generated so far for this current fiscal year, whether this fiscal year has just ended or whether this was generated over a longer period than a year. Therefore we are left here to speculate. Cost behavior patterns are not consistent in the long run  (Jones, Atkinson, & Lorenz, 2012) so it is important to identify the period for which these estimates will be valid. The data does not take into consideration that fixed or variable costs may increase over time due to changes in the economy or changes in operations. Looking at the figure for contribution margin and fixed costs, we can see that currently, the company can easily cover its fixed costs. 
The following table shows a CVP Analysis for the company. 
Break-even in units can be determined by dividing the total fixed cost by the contribution margin per unit. At the current selling price, the company must service $6000/($9,500,000/5000) which is 3,1578 events in order to break even. To calculate the break-even sales price at 5000 units we divide the total fixed cost by the number of units and add the total variable cost per unit (Hofstrand, 2007). Applying this formula we get $6,000,000/5000 + $2,600 =  $3,800. If the company consistently services 5000 events then it can lower its price to $3,800 and not lose any money but she would not make a profit either. The client needs to understand that it’s not just a simple matter of lowering offer price but also servicing sufficient clients to generate sufficient revenue. The client could very well offer her services at its current rate without losing money if she serves a minimum of 31578 events. Lowering prices means that contribution margin is also reduced and therefore it will require more sales to cover fixed costs. Now if the client wants to lower her prices even further, that means she has to service more events. I should also note that prices need to remain above $2,600 which is the variable cost per unit because there needs to be sufficient contribution margin to cover fixed costs. 
There is no guarantee that lowering prices will attract more customers and the company does not know what their competitor’s contribution margin is. Therefore, it should avoid engaging in a price war since it is just as easy for competitors to lower their price in response. A better strategy would be to reduce fixed cost. This would increase the contribution margin and thereby improve profit per unit and gives the company more flexibility to reduce prices. I would advise the client to focus on delivering a service that is superior and distinguishable from competitors and offers value to customers while maintaining a profitable selling price instead of competing on price. Instead, the client should focus on maintaining a substantial contribution margin. 

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