Diskmar has received a special order for 2,000 units of its product at a special price of $75. The product normally sells for $100 and has the following manufacturing costs: Direct material costs are $30; Direct labor costs are $20; and Variable Overhead costs are $15. Assume that Diskmar has sufficient capacity to fill the order without harming normal production and sales. a. If Diskmar accepts the order, what effect will the order have on the company's short-term profit? b. What minimum price should Diskmar charge to achieve a $25,000 incremental profit? c. Now assume Diskmar is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Diskmar accepts the order, what effect will the order have on the company's short-term profit?
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.
Diskmar has received a special order for 2,000 units of its product at a special price of $75. The product normally sells for $100 and has the following
Direct material costs are $30; Direct labor costs are $20; and Variable
Assume that Diskmar has sufficient capacity to fill the order without harming normal production and sales.
a. If Diskmar accepts the order, what effect will the order have on the company's short-term profit?
b. What minimum price should Diskmar charge to achieve a $25,000 incremental profit?
c. Now assume Diskmar is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Diskmar accepts the order, what effect will the order have on the company's short-term profit?
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