When studying a project, the following variable costs were estimated for a normal production capacity of 140,000 units, with a maximum capacity of 200,000 units: Materials $120,000 Labor $300,000 Other $80,000 Fixed costs are estimated, according to the level of production, in: Production Fixed Cost 0 – 40,000 $320,000 40,001 – 130,000 $380,000 130,001 – 180,000 $420,000 180,001 – 200,000 $500,000 If the selling price of each unit is $15 and the expected production is 100,000 units per year, what is the minimum number of additional units that need to be sold at the price of $11 per unit to show a profit of $762,000 per year? To raise sales to 120,000 units per year, how much could be spent additionally in advertising (fixed cost) so that by maintaining a price of $15, a profit of 20% on sales?
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.
When studying a project, the following variable costs were estimated for a normal production capacity
of 140,000 units, with a maximum capacity of 200,000 units:
Materials $120,000
Labor $300,000
Other $80,000
Fixed costs are estimated, according to the level of production, in:
|
Production |
Fixed Cost
|
|
0 – 40,000 |
$320,000 |
|
40,001 – 130,000 |
$380,000 |
|
130,001 – 180,000 |
$420,000 |
|
180,001 – 200,000 |
$500,000 |
If the selling price of each unit is $15 and the expected production is 100,000 units per year, what is
the minimum number of additional units that need to be sold at the price of $11 per unit to show a
profit of $762,000 per year? To raise sales to 120,000 units per year, how much could be spent
additionally in advertising (fixed cost) so that by maintaining a price of $15, a profit of
20% on sales?
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