A company manufactures computer games. The games are in demand all year round and in the next financial year the sales manager plans to sell 12,000 games. The trainee’s management accountant has provided the following cost information for 1 unit of computer game. The selling price is £10.00, and the variable cost will consist of direct, materials £1 .00 per unit, direct labour cost £5.00 per unit. The fixed cost for the year is expected to be £32,000. Required: You have been asked to provide information that will help the managing director consider the effect on profitability changes in the level of sales activity next year. a. Draw up a marginal statement that calculates the contribution per unit. b. Draw up a marginal cost statement on the basis that 12,000 units will be sold and calculate the net profit or loss. c. Briefly explain what is meant by breakeven points.
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.
A company manufactures computer games. The games are in demand all year round and in the
next financial year the sales manager plans to sell 12,000 games. The trainee’s
accountant
price is £10.00, and the variable cost will consist of direct, materials £1 .00 per unit, direct labour
cost £5.00 per unit. The fixed cost for the year is expected to be £32,000.
Required:
You have been asked to provide information that will help the managing director consider the
effect on profitability changes in the level of sales activity next year.
a. Draw up a marginal statement that calculates the contribution per unit.
b. Draw up a marginal cost statement on the basis that 12,000 units will be sold and calculate the
net profit or loss.
c. Briefly explain what is meant by breakeven points.
d. Calculate the breakeven units in value and explain what it means to the director.
e. Calculate the sales activity to reach a target profit of £20,000.
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