INTRODUCTION

Milestones

 Year 1857
That was the year Mathias Hohner founded the company that today is Hohner
Musikinstrumente GmbH & Co. KG. Its success was based on harmonicas bring into US
market. Since then they become the world's largest harmonica fabrication facility.

 Year 1896
The Hohner Marine Band harmonica was introduced which is named after the band led by John
Philip Sousa and become the most popular harmonica in the world. Business keep expanding
after Mathias Hohner’s son took over.

 Year 1960
When rock music has become the latest new trend and Asian competitors offer a lower cost.
Demand of harmonica is fading over years, Hohner sold 92% of ownership to a wood-products
manufacturer call Kunz-Holding. Thereafter, Kunz had sold Hohner to K.H.S Musical
Instrument which is a Taiwan based company which manages to restructure, and turnaround
plan has successful turn the company to be profitable after 20 years.

 Year 2000
Hohner stand steady in harmonica business with about 75% market share with the business
model that solely depend on distributor.

Break-Even Analysis

Schmidt who are newly promoted as Product Manager is required to an analysis for the break-
even point for company flagship product – Marine Band harmonica.

Break-even analysis is widely used to determine the number of units the business needs to sell
in order to avoid losses. This calculation required the business to determine selling price,
variable costs and fixed cost. (Martin, 2014)
METHODS OF ACCOUNTING ANALYSIS

A break-even analysis is a financial tool which helps you to determine at what stage your
company, or a new service or a product, will be profitable. In other words, it is a financial
calculation for determining the number of products or services a company should sell to cover
its costs (particularly fixed costs).

The case study for Hohner Musikinstrumente GmbH & Co. KG used break-even analysis
which is a method that is used by most organizations to determine, a relationship between costs,
revenue, and their profits at different levels of output. It helps in determining the point of
production at which revenue equals the costs. Break-even analysis is also called as profit
contribution analysis.

There are 2 components of Break Even Analysis which are the fixed costs and variable costs.
Fixed costs are also called as the overhead cost. These overhead costs occur after the decision
to start an economic activity is taken and these costs are directly related to the level of
production, but not the quantity of production.

Fixed costs include (but are not limited to) interest, taxes, salaries, rent, depreciation costs,
labour costs, energy costs etc. These costs are fixed no matter how much you sell. Whereas,
variable costs are costs that will increase or decrease in direct relation to the production volume.
These costs include the cost of raw material, packaging cost, fuel and other costs that are
directly related to the production.

The basic formula for break-even analysis is driven by dividing the total fixed costs of
production by the contribution per unit (price per unit less variable costs). Break-even analysis
also deals with the contribution margin of a product. The excess between the selling price and
total variable costs is known as contribution margin. In the calculation of the contribution
margin, fixed costs are not considered.
RESULTS AND INTERPRETATIONS

Since the year 2000, the global harmonica market was 800,000 units annually with Hohner’s
dominated 75% of the market share with yearly sales of 600,000 units. Other main competitors
are Lee Oscar with yearly sales of 80,000 units, capturing 10% of the market share with the
remaining 15% market share of 120,000 units sold by Suzuki in Asia and Hering in Brazil.

In order to increase the Marine Band harmonica sales, Hohner started new partnerships with
large retailers such as Guitar Center for € 20.10/unit of Marine Band. The break-even point
was 95,476 units with the contribution margin of € 15.03/unit with partnerships with large
retailers. Schmidt needed only a 12% market share to ensure Hohner will not suffer any loss.

Hohner’s business model through distributor channel was priced at € 17.688/unit of Marine
Band. The break-even point was 113,716 units with the lower contribution margin of €
12.619/unit. A higher market share of 14% needed to be achieved for the company to cover its
annual fixed cost of € 1,435,000. With the annual sales of € 10,612,800.00, Hohner’s operating
income stood at € 6,136,520.00. Sales can be dropped by no more than its margin of safety at
€ 8,601,398.326 before the company would begin to experience a loss, and the margin of safety
ratio is 81.05% from the break-even sales of € 2,011,401.674.

Schmidt has a thought of doubling Hohner’s advertising budget to € 1,000,000 with the
expectation of increased industry demand of additional 100,000 units harmonica in the
upcoming year. Fixed cost of the Marine Band will be increased to € 2.867/unit, aligned with
the new annual fixed cost of € 1,935,000. The variable cost of Marine Band remain unchanged
at € 5.069/unit. However, the break-even quantity will be increased to 153,338 units, even
though the contribution margin remain at € 12.619/unit with the same price to distributors at €
17.688/unit. This is due to the additional € 500,000 fixed expenses allocated in advertising. In
maintaining the same profit of € 6,136,520.00, Schmidt needs to sell 639,622 units of Marine
Band for 71.07% market share. If Hohner maintains its market share of 75% with 675,000 units
harmonicas sold, the company will be able to increase its revenue to € 11,939,400. The margin
of ratio will be slightly adjusted to 77.28% as the margin of safety will be increased from €
8,601,398.33 to € 9,227,161.51, with break-even sales of € 2,712,238.494.

Schmidt opted for the option of reducing its selling price to retailers from € 20.10/unit €
18.00/unit of Marine Band, remain optimism on the upcoming total harmonica market of
900,000 units without need to increase on the annual fixed expenses of the company. The fixed
cost of the company reduced from € 2.392/unit to € 2.126/unit as the forecasted Marine Band
to be sold will be increased to 675,000 units by maintaining the same market share of 75%. By
increasing the margin to retailers from 33% to 40%, Schmidt also reduced the distributor’s
profit indirectly from € 2.412/unit to € 2.160/unit even though the distributor’s margin
remained constant at 12% because the distributors will be buying at lower cost from Hohner at
€ 15.840/unit instead of € 17.688/unit previously. This also demotivated his sales team as the
10% commision was based on the selling price to distributors, reduced from € 1.769/unit to €
1.584/unit harmonica sold. The break-even quantity of Marine Band increased to 130,978 units
resulted from lower contribution margin of € 10.956/unit. Sales can be dropped by no more
than its margin of safety at € 8,617,301.205 before the company would begin to experience a
loss, and the margin of safety ratio is 80.60% from the break-even sales of € 2,074,698.795. In
maintaining the same profit of € 6,136,520.00, Schmidt needs to sell 691,084 units of Marine
Band for 76.79% market share, clearly more than the 75% market share. Holner’s operating
income will be € 5,960,300.00 if Schmidt maintains Hohner’s market share for his decision.

Certainly, raising the advertising budget of € 500,000 in fixed expenses is a better option
compared to the option of raising retailer’s margin from 33% to 40%, even though it seems
reversely because maintaining the fixed expenses is always important. However, break-even
analysis revealed that with the forecast increase in total market demand, the increase in sales
revenue generated by the increase in sales quantity at the same selling price for the same
projected profit can be achieved at a lower percentage from the current market share owned in
this scenario. This is because with the increase in sales revenue, the total operating income also
increase proportionately by the additional quantity from the same market share owned. If
Schmidt is able to perform break-even analysis, he would have to make the right decision for
the company.
CONCLUSION

Example of Break-even Analysis

In a nutshell, break-even analysis is a practical and popular tool for many businesses,
including start-ups. However, it is also imperative to note the limitations of the method when
using it.

Below is a summary of the key issues of the advantages and limitation of break-even analysis
from the context of the business environment in overall which is crucial in the decision making
process.

Advantages of Break-Even Analysis

 A very effective tool in the hands of management is profit planning. The higher the
break-even point, the less chances are of operating the business at a profit over the
years.

 Profit performance can be improved:-

a). by increasing volume;

b). by increasing selling price;

c). by decreasing variable costs, and

 d). by decreasing fixed costs

 It supplies the necessary framework for decision-making on the part of management.

“Break-even chart may convey different data and information to the management
like television which like cinemas indicate the changing conditions of profit
structure.” ---- Spencer A. Tucker

 It gives an idea about contribution which means the difference between sales and
variable cost. So, profit earning capacity of the firm may be known. Plus from the
amount of contribution fixed expenses when deducted, the profit figure will be
available.

 The margin of safety of the firm can be known from breakeven chart. Margin of safety
can be known by deducting breakeven sales from the actual sales. It plays an important
role as an indicator as to how the margin can be increased.

Disadvantages of Break-Even Analysis

It is criticised by some that break-even analysis is virtually useless for some firms—where
materials that fluctuate widely in price are a major cost, when product mix varies and profit
margins differ among, products, advertising or sales promotion efforts are important or where
product design or technology changes continuously over short periods where the following
limitations are worth mentioning:

a). dependent on certain assumption;

b). arbitrary valuation and classification of cost;

c). presumption on market conditions; and

d). less possibility in actual implementation

Dependent on certain assumptions, such as the price of goods remaining unchanged, whereas
the fluctuation in cost is only considered. As such the break-even chart may not be proper
indicator to cost analysis.
The concept that market conditions are not changeable, it becomes unreasonable to rely on
such a chart. In break-even analysis it is also a drawback to assume that the size of the factory,
process and techniques of production remain constant. It the age of technological development
such an assumption is rather absurd.