ABC sold boxes of candles at P1,000 each. For each box, ABC incurs variable cost of P750. Daily sales total 500 boxes over its 250-work day year. All sales are on credit. For the coming year, it plans to accept customers who have less desirable credit ratings. Sales are expected to increase by 10%. Average collection period will increase from 40 days to 50 days. Bad debts will increase from 1% to 3% of sales. Fixed expenses will stay the same. For profitability analysis, ABC uses an 8% effective interest rate. Required: If ABC proceeds with its plan to accept the new market group. compute for the following: 1. increase in contribution margin 2. increase in receivables carrying cost 3. increase in bad debts 4. net advantage or disadvantage
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 sold boxes of candles at P1,000 each. For each box, ABC incurs variable
cost of P750. Daily sales total 500 boxes over its 250-work day year. All sales
are on credit. For the coming year, it plans to accept customers who have less
desirable credit ratings. Sales are expected to increase by 10%. Average
collection period will increase from 40 days to 50 days.
increase from 1% to 3% of sales. Fixed expenses will stay the same. For
profitability analysis, ABC uses an 8% effective interest rate.
Required: If ABC proceeds with its plan to accept the new market group. compute for the following:
1. increase in contribution margin
2. increase in receivables carrying cost
3. increase in bad debts
4. net advantage or disadvantage of the plan
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