Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company’s present selling price is $70 per unit, and variable expenses are $40 per unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is 15,000 units. 3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit? 4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)? Why is this break- even point different from the break-even point you computed in (2) above?
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.
Minden Company introduced a new product last year for which it is trying to find an optimal selling price.
Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in
the selling price. The company’s present selling price is $70 per unit, and variable expenses are $40 per
unit. Fixed expenses are $540,000 per year. The present annual sales volume (at the $70 selling price) is
15,000 units.
3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company
can earn? At how many units and at what selling price per unit would the company generate this
profit?
4. What would be the break-even point in unit sales and in dollar sales using the selling price you
determined in (3) above (e.g., the selling price at the level of maximum profits)? Why is this break-
even point different from the break-even point you computed in (2) above?
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