The following information is available about the status and operations of Big Shot Corp., which has a required ROI of 15% and discount rate of 12%: Division A Division B Divisional Investment P 500,000 P 1,250,000 Divisional Profit P 350,000 P 625,000 Variable Cost P 500,000 P 3,500,000 Divisional Sales P1, 500,000 P 5,500,000 Division A could increase its sales by P 300,000 by increasing its investment by P300,000. Compute its ROI. Division A could increase its sales by P150,000 by increasing its investment by P400,000. Compute its total residual income. Division B could reduce its investment so that its asset turnover increased by 2, while holding total sales constant. Compute its residual income.
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.
The following information is available about the status and operations of Big Shot Corp., which has a required ROI of 15% and discount rate of 12%:
|
|
Division A |
Division B |
|
Divisional Investment |
P 500,000 |
P 1,250,000 |
|
Divisional Profit |
P 350,000 |
P 625,000 |
|
Variable Cost |
P 500,000 |
P 3,500,000 |
|
Divisional Sales |
P1, 500,000 |
P 5,500,000 |
- Division A could increase its sales by P 300,000 by increasing its investment by P300,000. Compute its ROI.
- Division A could increase its sales by P150,000 by increasing its investment by P400,000. Compute its total residual income.
- Division B could reduce its investment so that its asset turnover increased by 2, while holding total sales constant. Compute its residual income.
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