Vernon Company currently produces and sells 8,100 units annually of a product that has a variable cost of $8 per unit and annual f costs of $399,800. The company currently earns a $70,000 annual profit. Assume that Vernon has the opportunity to invest in new labor-saving production equipment that will enable the company to reduce variable costs to $6 per unit. The investment would cau fixed costs to increase by $10,900 because of additional depreciation cost. Required a. Use the equation method to determine the sales price per unit under existing conditions (current equipment is used).
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.
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