Concept explainers
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 for contribution margin is as follows:
Contribution margin = Sales - Variable cost.
Similarly contribution margin ratio = Contribution/sales
Breakeven Point:
The Breakeven point is the level of sales at which the net profit is nil. It can be explained as a situation where the business is generating a sale that is equal to the expenses incurred and hence no
To calculate:
The Breakeven Point in units and Sales
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- Break-even for a multiple product firm. can be calculated by dividing total fixed costs by the contribution margin of a composite unit can be calculated by multiplying fixed costs by the contribution margin ratio of a composite unit can only be calculated when the proportion of products sold is the same for all products can be calculated by multiplying fixed costs by the contribution margin ratio of the most common product in the sales mixarrow_forwardCost-Volume-Profit, Margin of Safety Victoria Company produces a single product. Last years income statement is as follows: Required: 1. Compute the break-even point in units and sales dollars calculated using the break-even units. 2. What was the margin of safety for Victoria last year in sales dollars? 3. Suppose that Victoria is considering an investment in new technology that will increase fixed cost by 250,000 per year but will lower variable costs to 45% of sales. Units sold will remain unchanged. Prepare a budgeted income statement assuming that Victoria makes this investment. What is the new break-even point in sales dollars, assuming that the investment is made?arrow_forwardManufacturing builds and sells switch harnesses for glove boxes. The sales price and variable cost for each follows: Their sales mix is reflected in the ratio 4:4:1. What is the overall unit contribution margin for JJ Manufacturing with their current product mix?arrow_forward
- Once sales reach the breakeven point, each additional unit sold will increase fixed cost by a proportionate amount. reduce the margin of safety. increase profit by an amount equal to the per unit contribution margin. increase the company’s operating leveragearrow_forwardBreak-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows: Total Sales $ 9,900,000 Total variable cost 6,039,000 Contribution margin $ 3,861,000 Total fixed cost 2,465,034 Operating income $ 1,395,966arrow_forwardContribution Margin, Break-Even Sales, A chart used to assist management in understanding the relationships among costs, expenses, sales, and operating profit or loss.Cost-Volume-Profit Chart, Indicates the possible decrease in sales that may occur before an operating loss results.Margin of Safety, and A measure of the relative mix of a business's variable costs and fixed costs, computed as contribution margin divided by operating income.Operating Leverage Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows: EstimatedFixed Cost Estimated Variable Cost(per unit sold) Production costs: Direct materials $22 Direct labor…arrow_forward
- Break-Even Units, Contribution Margin Ratio, Multiple-Product Breakeven, Margin of Safety, Degree of Operating Leverage Jellico Inc.'s projected operating income (based on sales of 450,000 units) for the coming year is as follows: Total Sales $ 11,700,000 Total variable cost 6,669,000 Contribution margin $ 5,031,000 Total fixed cost 3,083,444 Operating income $ 1,947,556 Required: 1(a). Compute variable cost per unit. Enter your answer to the nearest cent.$per unit 1(b). Compute contribution margin per unit. Enter your answer to the nearest cent.$per unit 1(c). Compute contribution margin ratio. % 1(d). Compute break-even point in units. units 1(e). Compute break-even point in sales dollars.$ 2. How many units must be sold to earn operating income of $404,716? units 3. Compute the additional operating income that Jellico would earn if sales were $50,000 more than expected.$ 4. For the projected level of sales, compute the margin of safety in units, and then in…arrow_forwardIdentify the formula that computes the degree of operating leverage (DOL). a.Total variable cost / Sales b.Unit variable cost / Price c.Break-even sales / Variable cost ratio d.Total contribution margin / Operating income e.Sales / Unit contribution margarrow_forwardWhat is the correct choice? Datamatix Company has gathered the following data: Unit Sales Price Unit Variable Costs Unit Sales Product 1 $18.00 $10.00 24,500 Product 2 27.00 17.00 17,500 Product 3 35.00 28.00 28,000 Fixed costs are $233,280. The weighted-average breakeven point is a. 34,500 units. b. 28,800 units. c. 25,200 units. d. 29,900 units.arrow_forward
- 2. What is the expected contribution margin ratio? Round to the nearest whole percent. 3. Determine the break-even sales in units and dollars. 4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales? 5. What is the expected margin of safety in dollars and as a percentage of sales? (Round to the nearest whole percent.) 6. Determine the operating leverage. Round to one decimal place.arrow_forwarda.Explain why contribution margin per unit becomes profit per unit above the break-even point b. If the contribution margin per unit is $7 and the break-even point is 10,000 units, how much profit will a firm make if 15,000 units are sold? c.What is the variable cost ratio? The contribution margin ratio? How are the two ratios related?arrow_forwardPROBLEM SOLVING: (show step by step solution) Break-even and target profits. Analysis of the operations of FAST Company shows the fixed costs to be P200,000 and the variable costs to be P8 per unit. Selling price is P16 per unit. Derive the break-even point expressed in units. How many units must the firm sell to earn a profit of P280,000? What would profits be if revenue from sales were P2,000,000?arrow_forward
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