5. Maxine, a very recent FBM graduate, plans to open wholesale diary products enterprises so that she can put her business skills into practice. Maxine expects first year sales to total 5.5 million shillings. She desires to earn a target pre-tax profit of b1 million shillings during her first year of operation. Her variable costs are expected to be 40% of sales Required: (i) How large can Maxine's fixed costs be if she is to meet her profit target? (ii) (ii)What is Maxine's break-even point at that level of fixed costs? (a) If the tax rate is 40% of the enterprise's income, what variable cost ratio would maintain the same target profit at the given sales level and the total fixed cost determined in (ii) above?
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.
Step by step
Solved in 2 steps with 2 images
