88,000 $9,408,000 Less: Direct fixed costs 1,200,000 960,00
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Steinberg Company produces commercial printers. One is the regular model, a basic model that is designed to copy and print in black and white. Another model, the deluxe model, is a color printer-scanner-copier. For the coming year, Steinberg expects to sell 80,000 regular models and 16,000 deluxe models. A segmented income statement for the two products is as follows:
| Regular Model | Deluxe Model | Total | ||||
| Sales | $12,800,000 | $10,720,000 | $23,520,000 | |||
| Less: Variable costs | 7,680,000 | 6,432,000 | 14,112,000 | |||
| Contribution margin | $5,120,000 | $4,288,000 | $9,408,000 | |||
| Less: Direct fixed costs | 1,200,000 | 960,000 | 2,160,000 | |||
| Segment margin | $3,920,000 | $3,328,000 | $7,248,000 | |||
| Less: Common fixed costs | 1,838,400 | |||||
| Operating income | $5,409,600 |
Required:
1. Compute the number of regular models and deluxe models that must be sold to break even. Round your answers to the nearest whole unit.
| Regular models | fill in the blank 1 units |
| Deluxe models | fill in the blank 2 units |
2. Using information only from the total column of the income statement, compute the sales revenue that must be generated for the company to break even. Round the contribution margin ratio to four decimal places. Use the rounded value in the subsequent computation. (Express as a decimal-based amount rather than a whole percentage.) Round the amount of revenue to the nearest dollar.
| Contribution margin ratio | fill in the blank 3 |
| Revenue | $fill in the blank 4 |
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