Q34818638

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Andhra University *

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ACCOUNTING

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Accounting

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Nov 24, 2024

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docx

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Q34818638 AID: 1825 | 26/02/2019 [Delimiter] [General guidance] [Section: Concepts and reason] Accounting: Accounting is a process of recording the transactions and classifying them in a specific manner. It is the process of summarizing and analyzing to interpret the results. It is a process of preserving the accounts. Marginal cost: Marginal cost is the change in the cost of production as output is changed. It is the cost altered by adding a single unit of goods or involving change in the service provided. Thus, the total cost of production is changed. CVP Analysis: Cost volume profit analysis is generally termed as CVP analysis. It determines the effect of operating income and net income due to the change in the cost and output. In CVP, variable cost per unit is constant, and total fixed cost is constant. Cost: Cost is any value spent to produce a product or to render any service. The types of costs are fixed cost and variable cost. [Section: Fundamentals] Selling price: Selling price is the price at which the products are sold in the market. It includes the total cost incurred on the product and profit. Contribution margin: The balance when the sales are deducted by the variable costs is known as contribution margin. The management uses contribution margin to develop the weight of sales mix for multiple products. The contribution margin signifies the profit earned before deducting the fixed costs. Break-even point: Break-even point is the stage where the income earned and expense incurred is equal. Thus, the net income at break-even point remains as Zero. Fixed cost: Fixed cost is a cost that remains the same, irrespective of the increase or decrease in the value of goods or any services rendered. It is the cost paid by the company that does not depend on the activities concerned with the business. Variable cost: Variable cost is a cost that varies according to the output produced or any service rendered. It is the cost paid by the company that depends on the activities concerned with the business. [Delimiter] [Starting Hint] Based on the information given in the question, calculate the contribution margin per unit. [Delimiter] [Step 1] Calculate the contribution margin per unit: Selling price per unit Contribution margin per unit = Variable cost per unit =$500 $250 $250          Therefore, the contribution margin per unit is $250. [Explanation] It is mentioned to calculate the break-even revenue. Thus, it is calculated using the contribution margin. The contribution margin is calculated by deducting the selling price per unit with the variable cost per unit. Therefore, the contribution margin per unit is $250. [Hint for next step] Based on the information given in the question, calculate the break-even revenue. [Delimiter] [Step 2] Calculate the break-even revenue: Annual fixed cost Break-even revenue = Contribution margin ratio $200,000 50% $400,000   Therefore, the break-even revenue is $400,000. Working notes: Calculate the contribution margin ratio:

Contribution margin per unit Contribution margin ratio = 100 Selling price per unit $250 100 $500 0.5 100 50%       Therefore, the contribution margin ratio is 50%. [Answer] The break-even revenue is $400,000. [Answer End] [Answer Choice: Wrong] The break-even revenue is $500,000. [Answer Choice End] [Answer Choice: Wrong] The break-even revenue is $250,000. [Answer Choice End] [Answer Choice: Correct] The break-even revenue is $400,000. [Answer Choice End] [Answer Choice: Wrong] The break-even revenue is $800,000. [Answer Choice End] [Explanation] It is mentioned to calculate the break-even revenue. Thus, it is calculated by dividing the annual fixed cost by the contribution margin ratio. The contribution margin ratio is calculated by dividing the contribution margin per unit by the selling price per unit multiplied with 100. Therefore, the contribution margin ratio is 50%. Also, the break- even revenue is $400,000. [Common mistakes] Do not consider the estimated sales for the year units to calculate the break-even revenue. The wrong formula to calculate the break-even revenue is as follows: Annual fixed cost Break-even revenue = Variable cost per unit The correct formula is as follows: Annual fixed cost Break-even revenue = Contribution margin ratio

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