Advanced Electronics manufactures DVDs and sells them directly to retailers, who typically sell them for €20. Retailers take a 40 per cent margin based on the retail selling price. Advanced’s cost information is as follows: DVD package and disc €2.50/DVDRoyalties €2.25/DVDAdvertising and promotion €500,000Overhead €200,000 Calculate the following:(a) contribution per unit and contribution margin(b) break-even volume in DVD units and dollars(c) volume in DVD units and euro sales necessary if Advanced’s profit goal is 20 per cent profit on sales(d) net profit if 5 million DVDs are sold
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.
Advanced Electronics manufactures DVDs and sells them directly to retailers, who typically sell them for €20. Retailers take a 40 per cent margin based on the retail selling price. Advanced’s cost information is as follows:
DVD package and disc €2.50/DVD
Royalties €2.25/DVD
Advertising and promotion €500,000
Overhead €200,000
Calculate the following:
(a) contribution per unit and contribution margin
(b) break-even volume in DVD units and dollars
(c) volume in DVD units and euro sales necessary if Advanced’s profit goal is 20 per cent profit on sales
(d) net profit if 5 million DVDs are sold
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