Big State University (BSU) is considering whether or not it should outsource its housekeeping service. Currently, BSU employs 400 housekeepers at an average annual wage of $23,000 plus another 39 percent for fringe benefits. Annual fixed costs associated with housekeeping are $1,278,800. Eric’s Efficient Cleaners (EEC) will provide similar housekeeping for a fixed annual cost of $7,500,000 plus a variable cost of $20,000 per housekeeper required. Because Eric uses state-of-the-art equipment and well-trained employees, his company would need only 80 percent of the current BSU housekeeper staff (or 320 housekeepers).
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.
Big State University (BSU) is considering whether or not it should outsource its housekeeping service. Currently, BSU employs 400 housekeepers at an average annual wage of $23,000 plus another 39 percent for
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