Karama Co., a manufacturer of wood chairs, had the following data for 2020: Sales Sales price Variable costs Fixed costs 2,600 units 50 JOD per unit 30 JOD per unit 24,000 JOD Instructions (a) What is the contribution margin ratio? (b) What is the break-even point in Dinar? (c) What is the margin of safety in Dinars and as a ratio? (d) If the company wishes to increase its total Dinar contribution margin by 30% in 2021, by how much will it need to increase its sales if all other factors remain constant?
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.
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