   Chapter 11, Problem 11.2.2P

Chapter
Section
Textbook Problem

Break-even sales under present and proposed conditions Kearney Company, operating at full capacity, sold 400,000 units at a price of \$246.60 per unit during 20Y5. Its income statement for 20Y5 is as follows: The division of costs between fixed and variable is as follows: Management is considering a plant expansion program that will permit an increase of \$8,631,000 (35.000 units at \$246.60) in yearly sales. The expansion will increase fixed costs by \$3,600,000 but will not affect the relationship between sales and variable costs.InstructionsDetermine for 20Y5 (a) the unit variable cost and (b) the unit contribution margin.

To determine

Concept Introduction:

Cost Volume Profit (CVP) Analysis:

The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.

Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula:

Contribution margin = Sales - Variable cost.

Similarly contribution margin ratio = Contribution/sales

To Calculate:

The Unit variable cost and unit contribution margin

Explanation

The Unit variable cost and unit contribution margin are calculated as follows:

 Total Variable costs (A) \$ 38,640,000 Number of units Produced (B) 400,000

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