Raveen Products sells camping equipment. One of the company’s products, a camp lantern, sells for $100 per unit. They managed to sell 10,000 lanterns per month. Variable expenses are $65 per lantern, and fixed expenses associated with the lantern total $140,000 per month. Required: Compute the company’s break-even point in number of lanterns. Compute the company’s break-even point in total sales dollars. Compute the company’s Margin of Safety in sales dollar.
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.
Raveen Products sells camping equipment. One of the company’s products, a camp lantern, sells for $100 per unit. They managed to sell 10,000 lanterns per month. Variable expenses are $65 per lantern, and fixed expenses associated with the lantern total $140,000 per month.
Required:
- Compute the company’s break-even point in number of lanterns.
- Compute the company’s break-even point in total sales dollars.
- Compute the company’s Margin of Safety in sales dollar.
- Compute the company’s Margin of Safety in percentage.
- If the variable expenses per lantern increase as a percentage of the selling price, Will it result in a higher or a lower break-even point? (Assume that the fixed expenses remain unchanged.)
Note: Write Higher or Lower in provided Box
At present, the company is selling 10,000 lanterns per month. The sales manager is convinced that a 15% reduction in the selling price will result in a 45% increase in the number of lanterns sold each month. Prepare two contribution format income statements, one under present operating conditions, and one as operations would appear after the proposed changes.
- Calculate Contribution Margin Amount of Present Operating Conditions
- Calculate Net Profit of Present Operating Conditions
- Calculate Contribution Margin Amount after Proposed Changes
- Calculate Net Profit after Proposed Changes
- Refer to the data of proposed changes of sales manager above. How many lanterns (Quantity only) would have to be sold at the new selling price to yield a minimum net operating income of $80,000 per month?
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