Breakeven Analysis

Product Costing Analysis

After observing the qualitative analysis which was done by the controller, I have noticed some serious errors in the calculation of variable costs and fixed costs. With these errors corrected you will notice that the new toy isn't as bad an idea as shown in my own quantitative analysis done below. Supervision costs are not variable costs. That's a salary expense and would go under fixed costs. After removing the supervision costs the variable costs for the new toy decreases and the fixed costs increases which will drastically effect the breakeven analysis. The only alternative with this issue is to remove the supervision costs from the variable costs and to add them to the fixed costs. The fact that supervision costs should be a fixed cost is a basic managerial accounting concept.

Breakeven Analysis

The breakeven analysis has been done incorrectly by the controller and when done correctly, would significantly change the prospects of the new toy "Bobby Bully". The first error I noticed was the controller used the variable costs for option 1, which are the highest, to analyze the break-even of all the options. He should have used the variable costs for each option separately to determine the break even. As discussed above the costs for the new toy were incorrect. As seen below in my quantitative analysis the new variances in the breakeven and projected sales is a lot less as shown in the controller's incorrect quantitative analysis. Although only option 2 has a good chance of breaking even there is a chance that the product may make a profit under the first 3 options. The managerial concept used for this analysis is the cost volume profit relationship which shows the relationship of the cost based on how much of the product sold.

Alternatives:

* The first alternative would be to terminate the "Bobby Bully" project as recommended by the controller. This would allow us to spend our money on a new project with higher probabilities of making profits.

* The second alternative would be to continue with the project and put the new toy up for sale. Based on the quantitative analysis and the probabilities of projected sales, a profit can be made from this toy, although the probability of that happening isn't as high as I would like it to be.

Recommendation

Based on the quantitative analysis below, "Bobby Bully" is unlikely to breakeven under any of the options other than option 2 so I would recommend going with the first alternative. Even with option 2 there is a 50% chance of breaking even and even less of a chance of making a profit. With options 1 or 2 there is also less than 50% chance of making a profit off the new toy. I cannot recommend moving on with