A company produces mineral water. Based on the projected annual sales of 40,000 bottles of mineral water, cost studies have produced the following estimates: Total annual costs (in rupees) Variable cost percentage Material 193,600 100 Labour 90,000 70 Overhead 80,000 64 Administration 30,000 30 The production will be sold through dealers who would receive a commission of 8% of sale price. Management to realize a profit of 10 percent of sales. Required: Calculate Net Profit
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.
A company produces mineral water. Based on the projected annual sales of 40,000 bottles of mineral water, cost studies have produced the following estimates:
Total annual costs
(in rupees) Variable cost percentage
Material 193,600 100
Labour 90,000 70
Administration 30,000 30
The production will be sold through dealers who would receive a commission of 8% of sale price.
Management to realize a profit of 10 percent of sales.
Required:
Calculate Net Profit
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