Anagram Ltd is in the manufacturing business; the organisation maintains a variable cost accounting statement for its internal purpose, which helps them take financial decisions and with financial planning. During the financial year 2020–21, the organisation has made total sales of £900,000, from sales of 4,000 units. The cost details are as follows: Amount (£) Cost of Materials Purchases 150,000 Labour cost 120,000 Production Overheads 200,000 Sales Overheads 100,000 Rent 140,000 Fixed Salaries 310,000 Repairs 30,000 Interest Cost 40,000 30% of production overheads are fixed in nature and 25% of variable overheads are fixed in the nature. Required: (a) Prepare the Variable Cost income statement for Anagram Ltd for the 2020-21 financial year. (b) For the 2021-22 financial year, assume Anagram Ltd’s direct costs increase by 10% (the other variable costs per unit remain constant) and its fixed costs are expected to be £280,000. On the basis of the company’s target profit margin of 15% on total cost, calculate the expected sales revenue for the year and expected selling price per unit if Anagram Ltd meets its sales target of 6,000 units.
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.
Anagram Ltd is in the manufacturing business; the organisation maintains a variable cost accounting statement for its internal purpose, which helps them take financial decisions and with financial planning. During the financial year 2020–21, the organisation has made total sales of £900,000, from sales of 4,000 units. The cost details are as follows:
Amount (£)
Cost of Materials Purchases 150,000
Labour cost 120,000
Production
Sales Overheads 100,000
Rent 140,000
Fixed Salaries 310,000
Repairs 30,000
Interest Cost 40,000
30% of production overheads are fixed in nature and 25% of variable overheads are fixed in the nature.
Required:
(a) Prepare the Variable Cost income statement for Anagram Ltd for the 2020-21 financial year.
(b) For the 2021-22 financial year, assume Anagram Ltd’s direct costs increase by 10% (the other variable costs per unit remain constant) and its fixed costs are expected to be £280,000. On the basis of the company’s target profit margin of 15% on total cost, calculate the expected sales revenue for the year and expected selling price per unit if Anagram Ltd meets its sales target of 6,000 units.
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