2.1 For the last 2 years, The Health Company has experienced a fixed cost of $850,000 per year and an (r - v) value of $1.25 per unit for its multivitamin line of products. International competition has become severe enough that some financial changes must be made to keep market share at the current level. (a) Plot a graphical analysis to estimate the effect on the breakeven point if the difference between revenue and variable cost per unit increases somewhere between 1% and 15% of its current value. (b) If fixed costs and revenue per unit remain at their current values, what type of change must take place to make the breakeven point go down? 2.2 Expand the analysis performed in Case Study 2.1 by changing the variable cost per unit. The financial manager estimates that fixed costs will fall to $750,000 when the required production rate to break even is at or below 600,000 units. What happens to the breakeven points over the (r - v) range of 1% to 15% increase as evaluated previously?
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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