A company that manufactures and sells one single product is currently operating at 85% of full capacity and producing 102 000 units per month. The current total monthly costs of production amount to R330 000, of which R75 000 are fixed and are expected to remain unchanged for all levels of activity up to full capacity. A new potential customer has expressed interest in taking regular monthly delivery of 12 000 units at a price of R2.80 per unit. All existing production is sold each month at a price of R3.25 per unit. If the new business is accepted, existing sales are expected to fall by 2 units for every 15 units sold to the new customer. Required Determine the overall increase in monthly profit which would result from accepting the new business.
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.
Study the scenario and complete the question that follows:
A company that manufactures and sells one single product is currently operating at 85% of full capacity
and producing 102 000 units per month. The current total monthly costs of production amount to R330
000, of which R75 000 are fixed and are expected to remain unchanged for all levels of activity up to full
capacity.
A new potential customer has expressed interest in taking regular monthly delivery of 12 000 units at a
price of R2.80 per unit.
All existing production is sold each month at a price of R3.25 per unit. If the new business is accepted,
existing sales are expected to fall by 2 units for every 15 units sold to the new customer.
Required
Determine the overall increase in monthly profit which would result from accepting the new
business.
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