2. A company provided the following information: Sales Variable costs Fixed costs P500,000 P100,000 P200,000 | Required: A. What is the contribution margin ratio? 500,000 – 100,000 = 400,000 "Contribution Margin" 400,000/500,000 = 0.8 What is the level of sales in amount necessary to generate a profit of P40,000? C. What is the contribution margin ratio if the sales price is increased by 10%? Using the information in part C, what level of sales in amount is necessary to generate a profit of P40,0007 D. B.
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.
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