ABC, Inc., a merchandising company, reported sales of 5,000 units in June at a selling price of $50 per unit. Cost of goods sold, was $30 per unit. Variable selling expenses were $8 per unit and variable administrative expenses were $2 per unit. The total fixed selling expenses were $2,000 and the total administrative expenses were $8,000. The contribution margin for June was: A. $40,000 B. $50,000 C. $100,000 D. $250,000
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.
![3. ABC, Inc., a merchandising company, reported sales of 5,000 units in June at a selling price
of $50 per unit. Cost of goods sold, was $30 per unit. Variable selling expenses were $8 per
unit and variable administrative expenses were $2 per unit. The total fixed selling expenses
were $2,000 and the total administrative expenses were $8,000.
The contribution margin for June was:
A. $40,000
B. $50,000
C. $100,000
D. $250,000
4. Which of the following should NOT be included as part of manufacturing overhead at a
company that manufactures furniture?
A. Insurance on production machinery.
B. Depreciation of manufacturing equipment.
C. Wages for assembly workers.
D. Taxes on a factory building.
5. Which of the following statements is correct:
A. total fixed cost remain constant while variable cost as total increases as level of activities
decreases.
B. fixed cost per unit and total variable costs increases as level of activities increases.
C. variable cost per unit and total fixed cost remain constant as level of activities increases.
D. fixed cost per unit remain constant and variable cost per unit decreases as level of
activities decreases.
40
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