ABC Company manufactures the product XE-17. The product is sold at a unit price of $70. Variable expenses are $13.50 per unit and fixed expenses are $220,000 per year. Required : a. What should be the product’s CM ratio? b. Calculate the BEP is sales dollars and in units for ABC Company. c. The manager of ABC company estimates that in the coming year, the company’s sales will increase by $80,000 (from the current sales). How much should the net profit / loss increase/ decrease if the fixed costs remain constant? d. The manager of ABC company predicts that by spending an additional $80,000 per year on advertising and using higher quality raw material (which will in turn increase the raw material cost per unit by $3), and increasing selling price per unit by 2% (to compensate for the increased costs), unit sales will increase by two- thirds of the current sales units. Should the company go with the manager’s proposed plan? Explain your answer. (Assume that in the current year, the company sold 5,600 units of XE-17) e. (Refer to question no. d). Assume that the company went with the manager’s plan, however, the predictions were not correct and the demand for XE-17 decreased by 4,000 units from the estimated units (from question no. d) as selling price per unit was raised by 2%. Now the manager is estimating that by changing the selling price per unit, the current net profit amount can be conveniently maintained. Calculate what should be the new selling price per unit (calculate the approximated value) in order to maintain the net profit that the company is making now after going with the manager’s plan from information number . d (Would be great if all the workings are shown as I am trying to understand them)
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.
ABC Company manufactures the product XE-17. The product is sold at a unit price of $70.
Variable expenses are $13.50 per unit and fixed expenses are $220,000 per year.
Required :
a. What should be the product’s CM ratio?
b. Calculate the BEP is sales dollars and in units for ABC Company.
c. The manager of ABC company estimates that in the coming year, the company’s sales will
increase by $80,000 (from the current sales). How much should the net
decrease if the fixed costs remain constant?
d. The manager of ABC company predicts that by spending an additional $80,000 per year on
advertising and using higher quality raw material (which will in turn increase the raw material
cost per unit by $3), and increasing selling price per unit by 2% (to compensate for the
increased costs), unit sales will increase by two- thirds of the current sales units. Should the
company go with the manager’s proposed plan? Explain your answer. (Assume that in the
current year, the company sold 5,600 units of XE-17)
e. (Refer to question no. d). Assume that the company went with the manager’s plan, however,
the predictions were not correct and the demand for XE-17 decreased by 4,000 units from the
estimated units (from question no. d) as selling price per unit was raised by 2%. Now the
manager is estimating that by changing the selling price per unit, the current net profit amount
can be conveniently maintained. Calculate what should be the new selling price per unit
(calculate the approximated value) in order to maintain the net profit that the company is
making now after going with the manager’s plan from information number . d
(Would be great if all the workings are shown as I am trying to understand them)
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