VP with taxes. Lighthouse Company, maker of quality flashlights, has experienced a steady growth in sales for the past five years. However, increased competition has led Mr. Das, the CEO to believe that to maintain the company's present growth requires an aggressive advertising campaign next year. To prepare the next year's advertising campaign, the company's accountant has prepared and presented to Mr. Das the following data for the current year, Year 1 Cost Schedule Variable Costs: Direct Labor: Direct Material Variable Overhead Total Variable costs $10.00 Per Flashlight $ 4.50 $ 2.00 $16.50 per Flashlight Fixed Costs: Manufacturing Selling Administrative Total Fixed Costs $ 40,000 30,000 80,000 $ 150,000 Selling price per Flashlight Expected Sales, Year 1 (25,000) Tax Rate: 35% 40 .00 $1,000,000 Mr. Das has set the sales target for Year 2 at a level of $1,120,000 or (28,000 flashlights) Show work/calculation What is the projected after-tax operating profit for Year 1? What is the after-tax break-even in units for Year 1? Das believes that to attain the sales target (28,000 flashlights) requires an additional selling expense of $40,000 for advertising in Year 2, with all other costs maintaining constant. What will be the after-tax operating profit for Year 2 if the firm spends the additional $40,000?
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.
CVP with taxes. Lighthouse Company, maker of quality flashlights, has experienced a steady growth in sales for the past five years. However, increased competition has led Mr. Das, the CEO to believe that to maintain the company's present growth requires an aggressive advertising campaign next year. To prepare the next year's advertising campaign, the company's accountant has prepared and presented to Mr. Das the following data for the current year, Year 1
Cost Schedule
|
Variable Costs: Direct Labor: Direct Material Variable Overhead Total Variable costs |
$10.00 Per Flashlight $ 4.50 $ 2.00 $16.50 per Flashlight
|
|
Fixed Costs: Manufacturing Selling Administrative Total Fixed Costs |
$ 40,000 30,000 80,000 $ 150,000 |
|
Selling price per Flashlight Expected Sales, Year 1 (25,000) Tax Rate: 35% |
40 .00
$1,000,000 |
Mr. Das has set the sales target for Year 2 at a level of $1,120,000 or (28,000 flashlights) Show work/calculation
- What is the projected after-tax operating profit for Year 1?
- What is the after-tax break-even in units for Year 1?
- Das believes that to attain the sales target (28,000 flashlights) requires an additional selling expense of $40,000 for advertising in Year 2, with all other costs maintaining constant. What will be the after-tax operating profit for Year 2 if the firm spends the additional $40,000?
- What will be the after-tax break-even point in sales dollars for Year 2 if the firm spends the additional $40,000?
- If the firm spends the additional $40,000 in advertising in Year 2, what is the sales level in dollars required to equal Year 1 after-tax operating profit?
- At a sale level of 28,000 units, what is the minimum amount the firm can spend on advertising to earn an after-tax operating profit of $75,000?
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