The HASF Ink Ltd income statement for the preceding year is presented below except as noted the cost / revenue relationship for the coming year is expected to follow the same pattern as in the preceding year income statement for the year ending March 31 is as follows: Sales (200,000 units @ 2.5 Each) Rs. 5, 00,000 Variable cost 3, 00,000 Contribution margin 2, 00,000 Less Fixed cost 100,000 Profit before tax 100,000 Less tax 35,000 Profit after tax 65,000 Required: 1- The company management feels that it should earn at least Rs.10000 pre taxes per annum on the new investment what sales volume is required to enable the company to maintain existing profit. 2- Suppose that a plant expansion will add Rs. 50,000 and increase capacity by 60% how many units would have to be sold after the addition to break even. 3- Suppose the plant operated at full capacity after the expansion what profit will be earned ?
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 HASF Ink Ltd income statement for the preceding year is presented below except as noted the cost / revenue relationship for the coming year is expected to follow the same pattern as in the preceding year income statement for the year ending March 31 is as follows:
Sales (200,000 units @ 2.5 Each) Rs. 5, 00,000
Variable cost 3, 00,000
Contribution margin 2, 00,000
Less Fixed cost 100,000
Profit before tax 100,000
Less tax 35,000
Profit after tax 65,000
Required:
1- The company management feels that it should earn at least Rs.10000 pre taxes per annum on the new investment what sales volume is required to enable the company to maintain existing profit.
2- Suppose that a plant expansion will add Rs. 50,000 and increase capacity by 60% how many units would have to be sold after the addition to break even.
3- Suppose the plant operated at full capacity after the expansion what profit will be earned ?
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