Problem 2: Contribution margin income statements for Beyonce Couture and Rihanna Cosmetics for the year ended 2020 are as follows: Contribution Margin Income Statement for the year ended 2020 Beyonce Couture 2,500,000 Rihanna Cosmetics Sales 3,000,000 Less: Variable Costs Cost of Goods Sold 512,367 645,978 Selling and Administrative Expenses Total Variable Costs Contribution Margin 269,874 782,241 1,717,759 366,771 1,012,749 1,987,251 Less: Fixed Costs Rent Expense Wages and Salaries Total Fixed Costs Operating Income 560,000 369,746 929,746 1,057,505 420,000 267,898 687,898 1,029,861 Suppose that the total number of variable costs per unit sold are P131.58 for Beyonce Couture and P111.11 for Rihanna Cosmetics. Compute for the operating leverage of both companies.
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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