For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000. Construct a cost-volume-profit chart on a sheet of paper. Indicate whether each of the following levels of sales (units or dollars) is in the operating profit area, operating loss area, or at the break-even point. 4,800 units: 12,000 units: $1,500,000: 20,000 units: $2,500,000: Estimate the break-even sales (dollars) by using the cost-volume-profit chart constructed in part (a).
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.
For the coming year, Loudermilk Inc. anticipates fixed costs of $600,000, a unit variable cost of $75, and a unit selling price of $125. The maximum sales within the relevant range are $2,500,000.
- Construct a cost-volume-profit chart on a sheet of paper. Indicate whether each of the following levels of sales (units or dollars) is in the operating
profit area, operating loss area, or at the break-even point.
4,800 units:
12,000 units:
$1,500,000:
20,000 units:
$2,500,000:
- Estimate the break-even sales (dollars) by using the cost-volume-profit chart constructed in part (a).
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
