Newton Cellular ltd. Manufactures and sells the TopLine Cell phone. For its 2021 business plan, Newton Cellular estimated the following: Selling price $750 Variable cost per cell phone $450 Annual fixed costs $180,000 Net (after-tax) income $360,000 Tax rate 25% The March financial statements reported that sales were not meeting expectations. For the first three months of the year, only 400 units had been sold at the established price. With variable costs and fixed costs staying as planned, it was clear that the 2021 after-tax profit projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president: Reduce the selling price by $80. The sales team forecasts that, with the significantly reduced selling price, 5,000 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted. Reduce variable cost per unit by $30 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price can then be reduced by $50, and we should be able to increase sales to 5,800 units for the remainder of the year forecast. Cut fixed costs by 40,000 and lower the selling price by 10%. Variable costs per unit will be reduced by 10% . Sales of 5,500 units are expected for the remainder of the year. QUESTIONS: a.Under the current cost and pricing structure, determine the number of units that the company must sell to (1) break even and (2) achieve its desired net income. b.Prepare the calculations for each alternative, presenting a CVP statement for the WHOLE year for each alternative. Select the best alternative. Show calculations for each alternative.
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.
Newton Cellular ltd. Manufactures and sells the TopLine Cell phone. For its 2021 business plan, Newton Cellular estimated the following:
Selling price $750
Variable cost per cell phone $450
Annual fixed costs $180,000
Net (after-tax) income $360,000
Tax rate 25%
The March financial statements reported that sales were not meeting expectations. For the first three months of the year, only 400 units had been sold at the established price. With variable costs and fixed costs staying as planned, it was clear that the 2021 after-tax profit projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president:
- Reduce the selling price by $80. The sales team
forecasts that, with the significantly reduced selling price, 5,000 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted. - Reduce variable cost per unit by $30 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price can then be reduced by $50, and we should be able to increase sales to 5,800 units for the remainder of the year forecast.
- Cut fixed costs by 40,000 and lower the selling price by 10%. Variable costs per unit will be reduced by 10% . Sales of 5,500 units are expected for the remainder of the year.
QUESTIONS:
a.Under the current cost and pricing structure, determine the number of units that the company must sell to (1) break even and (2) achieve its desired net income.
b.Prepare the calculations for each alternative, presenting a CVP statement for the WHOLE year for each alternative. Select the best alternative. Show calculations for each alternative.
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