Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costsare $8 per unit, and fixed costs total $180,000 per year.Required:Answer the following independent questions:1. What is the product’s CM ratio?2. Use the CM ratio to determine the break-even point in sales dollars.3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during thenext year. By how much should net operating income increase (or net loss decrease) assuming thatfixed costs do not change?4. Assume that the operating results for last year were:Sales .................................................................... $400,000Variable expenses ............................................... 160,000Contribution margin ............................................. 240,000Fixed expenses ................................................... 180,000Net operating income .......................................... $ 60,000
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.
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs
are $8 per unit, and fixed costs total $180,000 per year.
Required:
Answer the following independent questions:
1. What is the product’s CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the
next year. By how much should net operating income increase (or net loss decrease) assuming that
fixed costs do not change?
4. Assume that the operating results for last year were:
Sales .................................................................... $400,000
Variable expenses ............................................... 160,000
Contribution margin ............................................. 240,000
Fixed expenses ................................................... 180,000
Net operating income .......................................... $ 60,000
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