After reviewing its cost structure (variable costs of P6.00 per unit and monthly fixed costs of P120,000) potential market, Fore Company established what it considered to be a reasonable selling price. The company expected to sell 50,000 units per month and planned its monthly results as follows: Sales P500,000 Variable costs 300,000 Contribution Margin 200,000 Fixed costs 120,000 Income before taxes 80,000 Income taxes (40%) 32,000 Net income 48,000 Compute for the following: 1. If the company determined that a particular advertising campaign had a high probability of increasing sales by 3,000 units, how much could it pay for such campaign without reducing its planned profits? 2. A plan includes an increase in advertising cost of P20,000. What is the minimum increase in unit sales to compensate for the increase in advertising cost? 3. If the company wants a P60,000 before-tax profit, how many units must it sell?
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.
After reviewing its cost structure (variable costs of P6.00 per unit and monthly fixed costs of P120,000) potential market, Fore Company established what it considered to be a reasonable selling price. The company expected to sell 50,000 units per month and planned its monthly results as follows:
Sales P500,000
Variable costs 300,000
Contribution Margin 200,000
Fixed costs 120,000
Income before taxes 80,000
Income taxes (40%) 32,000
Net income 48,000
Compute for the following:
1. If the company determined that a particular advertising campaign had a high probability of increasing sales by 3,000 units, how much could it pay for such campaign without reducing its planned profits?
2. A plan includes an increase in advertising cost of P20,000. What is the minimum increase in unit sales to compensate for the increase in advertising cost?
3. If the company wants a P60,000 before-tax profit, how many units must it sell?
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