Compute break-even point of the company in dollars and units. 2. According to a research conducted by sales department, a 10% reduction in sales price will result in 25% increase in unit sale. Please comment whether proposal should be accepted or rejected. Suggestion: (Dear students , I suggest you to use a sheet and prepare two income statements in contribution margin format, one using the current price and one using proposed price (10% below the old sales price) and then comment whether proposal should be accepted or rejected. 3. Compute the number of rechargeable lights to be sold to earn a net operating income of $189,000 per month (use original data).
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.
Pakshal electric company manufactures a number of electric products. Rechargeable light is one of the Pakshal’s products that sells for $180/unit. Total fixed expenses related to rechargeable electric light are $270,000 per month and variable expenses involved in manufacturing this product are $126 per unit. Monthly sales are 8,000 rechargeable lights.
Required:
1. Compute break-even point of the company in dollars and units.
2. According to a research conducted by sales department, a 10% reduction in sales price will result in 25% increase in unit sale. Please comment whether proposal should be accepted or rejected. Suggestion: (Dear students , I suggest you to use a sheet and prepare two income statements in contribution margin format, one using the current price and one using proposed price (10% below the old sales price) and then comment whether proposal should be accepted or rejected.
3. Compute the number of rechargeable lights to be sold to earn a net operating income of $189,000 per month (use original data).
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