elematics Incorporated manufactures flat-screen television sets. The company’s contribution format income statement for 2021 is given below: Total Per Unit Percentage of Sales Sales (25,000 units) $ 2,500,000 $ 100 100% Less variable expenses $ 1,500,000 $ 60 ? % Contribution Margin $ 1,000,000 $ 40 ? % Less Fixed Expenses $ 800,000 Operating Income $ 200,000 Management believes operating income can be further improved and would like you to prepare the following analysis: Required: Refer to the original data. Assume that next year, management wants the company to earn a minimum profit of $ 500,000. How many units will have to sold to meet this target profit figure? Refer to the original data. Compute the company’s margin of safety in both dollar and percentage form. Assume that, through a more intense effort by the sales staff, the company’s sales increase by 12 %. By what percentage would you expect operating income to increase? Verify your answer by preparing a new income statement showing a 12 % increase in sales.
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.
Telematics Incorporated manufactures flat-screen television sets. The company’s contribution format income statement for 2021 is given below:
|
|
Total |
Per Unit |
Percentage of Sales |
|
Sales (25,000 units) |
$ 2,500,000 |
$ 100 |
100% |
|
Less variable expenses |
$ 1,500,000 |
$ 60 |
? % |
|
Contribution Margin |
$ 1,000,000 |
$ 40 |
? % |
|
Less Fixed Expenses |
$ 800,000 |
|
|
|
Operating Income |
$ 200,000 |
|
|
Management believes operating income can be further improved and would like you to prepare the following analysis:
Required:
- Refer to the original data. Assume that next year, management wants the company to earn a minimum profit of $ 500,000. How many units will have to sold to meet this target profit figure?
- Refer to the original data. Compute the company’s margin of safety in both dollar and percentage form.
- Assume that, through a more intense effort by the sales staff, the company’s sales increase by 12 %. By what percentage would you expect operating income to increase? Verify your answer by preparing a new income statement showing a 12 % increase in sales.
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