The Pakistan Cables (Pvt) Ltd., a manufacturer of quality electric cables, has experienced a steady growth in its sales for the past five years. Increased competition, however, has led the CEO to believe that an aggressive advertising campaign will be necessary next year to maintain the company’s present growth. To prepare for next year’s advertising campaign, the accountant presents the following data for the current year i.e. 2020: Variable Cost: Direct Labor Rs. 8.00 per unit Direct Material 3.25 per unit Variable FOH 2.50 per unit Page 4 of 4 Fixed Cost: Manufacturing 25,000 Marketing 40,000 Administrative 70,000 Sales Price Per Unit 25 Expected Sales, 2020 (20,000 units) 500,000 The company set the 2021 sales target at a level of Rs. 550,000 or 22,000 units. Required: 1. The projected Net Income for 2020. 2. The breakeven point in units for 2020. 3. The net income for 2021 if an additional fixed marketing expense of Rs. 11,250 is spent for advertising in 2021. All other cost remains constant. 4. The breakeven point in amount sales for 2021 if an additional fixed marketing expense of Rs. 11,250 is spent for advertising. 5. The required amount of sales to equal 2020 net income, if an additional fixed marketing expense of Rs. 11,250 is spent for advertising in 2021. 6. The maximum amount that can be spent on additional advertising at a sales level of 22,000 units, if net income of Rs.100,000 is desired
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 Pakistan Cables (Pvt) Ltd., a manufacturer of quality electric cables, has experienced a
steady growth in its sales for the past five years. Increased competition, however, has led the
CEO to believe that an aggressive advertising campaign will be necessary next year to maintain
the company’s present growth.
To prepare for next year’s advertising campaign, the accountant presents the following data for
the current year i.e. 2020:
Variable Cost:
Direct Labor Rs. 8.00 per unit
Direct Material 3.25 per unit
Variable FOH 2.50 per unit
Page 4 of 4
Fixed Cost:
Manufacturing 25,000
Marketing 40,000
Administrative 70,000
Sales Price Per Unit 25
Expected Sales, 2020 (20,000 units) 500,000
The company set the 2021 sales target at a level of Rs. 550,000 or 22,000 units.
Required:
1. The projected Net Income for 2020.
2. The breakeven point in units for 2020.
3. The net income for 2021 if an additional fixed marketing expense of Rs. 11,250 is
spent for advertising in 2021. All other cost remains constant.
4. The breakeven point in amount sales for 2021 if an additional fixed marketing expense
of Rs. 11,250 is spent for advertising.
5. The required amount of sales to equal 2020 net income, if an additional fixed
marketing expense of Rs. 11,250 is spent for advertising in 2021.
6. The maximum amount that can be spent on additional advertising at a sales level of
22,000 units, if net income of Rs.100,000 is desired
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