Shredder Manufacturing has the following projected unit sales (at $18 per unit) for four months of operations: Month Unit Sales January 60,000 February 72,000 March 76,800 April 84,000 Twenty-five percent of the customers are expected to pay in the month of sale and take a 3 percent discount; 70
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.
Shredder Manufacturing has the following projected unit sales (at $18 per unit) for four months of operations:
| Month | Unit Sales |
| January | 60,000 |
| February | 72,000 |
| March | 76,800 |
| April | 84,000 |
Twenty-five percent of the customers are expected to pay in the month of sale and take a 3 percent discount; 70 percent of the customers are expected to pay in the month following sale. The remaining 5 percent will never pay.
It takes two pounds of raw material (costing $0.75 per pound) to produce a unit of product. In January, no raw material is in beginning inventories, but management wants to end each month with enough material for 20 percent of the next month’s production. (April’s production is assumed to be 81,600 units.) Shredder Manufacturing pays for 60 percent of its material purchases in the month of purchase and 40 percent in the following month.
Each unit of product requires 0.5 hours of labor time. Labor is paid $15 per hour and is paid in the same month as worked. Overhead is estimated to be $2 per unit plus $60,000 per month (including
Shredder will begin January with no Work in Process or Finished Goods Inventory. Inventory policy for these two accounts is set at zero ending WIP and 25 percent of the following month’s sales for FG.
b. Prepare a production budget for January, February, and March.
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