Flora’s Flats produces comfortable and portable women’s shoes designed to be worn as a second pair of shoes after a formal event. The company has the following financial information: The company’s sales price is $20 per unit. The variable costs of producing flats is $6 per unit. The company expects to have fixed costs of $10,000 next year. The company expects to sell 1,000 pairs of flats next year. Assume no taxes. Required: Calculate the breakeven point in units. Calculate the breakeven point in dollars. How many units must the company sell to reach a target profit of $25,000? Prepare a budgeted contribution format income statement. Compute the margin of safety in both dollar and percentage terms. Compute the degree of operating leverage. If sales increase by 20% in the following year, how much would net income increase (use the degree of operating leverage to compute your answer).
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.
Question 1:
Flora’s Flats produces comfortable and portable women’s shoes designed to be worn as a second pair of shoes after a formal event. The company has the following financial information:
The company’s sales price is $20 per unit. The variable costs of producing flats is $6 per unit. The company expects to have fixed costs of $10,000 next year. The company expects to sell 1,000 pairs of flats next year. Assume no taxes.
Required:
- Calculate the breakeven point in units.
- Calculate the breakeven point in dollars.
- How many units must the company sell to reach a target profit of $25,000?
- Prepare a
budgeted contribution format income statement. - Compute the margin of safety in both dollar and percentage terms.
- Compute the degree of operating leverage.
- If sales increase by 20% in the following year, how much would net income increase (use the degree of operating leverage to compute your answer).
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