The Goodyear Tire & Rubber Company

The ability to make sound decisions is crucial for an organization’s success. In most circumstances, judgments are made based on prior performance, which is analyzed for forecasting and planning purposes. In making managerial decisions, management may do a break-even analysis under cost volume profit analysis. This study assists managers in determining the appropriate level of output and sales to cover all expenditures and leave their company in a position to profit (Rajasekaran, 2010).

This paper seeks to calculate Goodyear Tire & Rubber Company’s break-even point and explain all of the variables involved, including variable costs, fixed expenses, and revenues. The Goodyear Tire & Rubber Company is headquartered in Akron, Ohio, and its formation took place in 1898. It offers tires and rubber products for all types of vehicles, and earth moving and mining equipment. It also produces industrial equipment, farm implements as well as other application under the brands, Goodyear, Sava, Debica, Kelly, Fulda, and Dunlop among others.

Calculation of Break-even Point

Fixed costs $ millions

Selling, administrative and general expenses 2,614.00

Rationalizations 114.00

Interest expense 412.00

Total 3,140.00

Sales 16,443.00

Variable costs 12,164.00

Contribution 4,279.00

Contribution-sales ratio = 4,279/ 16,443

= 0.26

Break-even point = fixed costs/contribution-sales ratio =3,140/0.26

= 12,066.14

Findings and Discussions

The data used to compute the breakeven point was obtained from the 2015 audited annual report. From the above information and the product mix, Goodyear generates its revenues from a number of sources. In the period ended December 31, 2015, Goodyear Tire’s revenues were $16, 443 million. In determining the variable costs, this paper used the cost of goods sold. In essence, the variable costs were those linked to the raw materials, shipping and handling, other tire-related businesses, the manufacturing facilities, mixing and retreading plants, and the research and development costs related to compensation and contract services, materials and equipment (Goodyear Tire & Rubber Company, 2015, p. 10 & p. 52). Therefore, the total 2015’s variable costs were established to be $12, 164 million. In the case of the fixed costs, this paper used the company’s operating expenses which included the selling, administrative and general expenses. Other expenses that were included as fixed costs in the calculation of the Goodyear’s break-even point are the environmental cleanup costs, rationalization charges, and interest expenses. In total, the expenses deemed to constitute the fixed cost element were $3,140 million.

The break-even point can be computed in terms of sales or units. In the case of the Goodyear Tire, this paper used the sales approach because it would be difficult to determine it in terms of units given the product mix and varying unit selling price with the region of operation. The contribution was determined to be $4,279 million (sales $16,443 million - variable costs $12,164 million). Then, the contribution margin ratio was calculated by expressing the contribution value as a proportion of revenues, and it was established to be 26%. When the total fixed of $3,140 was divided by the contribution margin ratio of 26%, the break-even point in sales was found to be $12,066 million.

Conclusion

Assuming that the Goodyear Tire & Rubber Company’s performance remain the same, these results imply that it will be required to realize sales worth $12,066 million for it to break-even (cover all costs and be at a zero profit state). These revenue amounts will be enough to cover the fixed costs of $3,140 million and the 74% variable costs.

References

Goodyear Tire & Rubber Company. (2015). Goodyear Tire 2015 annual report. Akron, Ohio: Goodyear Tire & Rubber Company.

Rajasekaran, V. (2010). Cost accounting. New Delhi: Pearson Education India.