Peter Limited manufactures and sell a single product. Peter Limited for the month of February 20x8 estimated its total sales units to be 15 000 units where each units is R20. The following information relates to the expenditure incurred by Peter Limited for the month of February per unit: Variable Manufacturing cost R12.00 Variable selling cost R1.20 Variable cost are 66% of the total cost. Fixed manufacturing overheads of R10 800, administrative cost amounts to R20 500 and selling cost of R20 000 were incurred.
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.
- Calculate Peter Limited’s Net
- Determine breakeven units and in Value.
- Determine marginal safety units and Value.
- Calculate the number of Units to be sold if Peter Limited anticipate to realise a net profit of R150 000.
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