a- What is the breakeven quantity for this product using graphical method. b- What is the marginal profit for last year c- The company is considering two alternatives to increase profit. The first method is to increase sales by 35% while the second method is to reduce variable cost by 50%.
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.
Alhasan company produces plastic items. Plastic chairs has had low contribution to profits. Last
year 20000 units were produced and sold. The selling price was 20$ per unit with a variable cost of
18 and fixed cost of 70000 per year,
a- What is the breakeven quantity for this product using graphical method.
b- What is the marginal profit for last year
c- The company is considering two alternatives to increase profit. The first method is to
increase sales by 35% while the second method is to reduce variable cost by 50%.
i. Assuming all other factors constant, which alternative will lead to a higher
profit and by how much.
ii. What are the factors that should be taken into consideration in each
alternative to succeed in achieving such profit
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