Apple offers extended service contracts that provide repair coverage for its products. Assume Apple charges $160 to repair an iPhone screen and $400 for other repairs. Services are provided in a ratio of 2 screens to 1 other repair (2:1). Variable costs are 40% of selling price for iPhone screen repairs and 48% of selling price for other repairs. Assume fixed costs are $2 billion per year for the repair services department. Required 1. Compute the selling price per composite unit for Apple’s repair services. 2. Compute the variable cost per composite unit for Apple’s repair services. 3. How many composite units must Apple’s repair services department sell each year to break even? 4. At the break-even level, how many screen repairs and other repairs will Apple complete each year?
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.
Apple offers extended service contracts that provide repair coverage for its products. Assume
Apple charges $160 to repair an iPhone screen and $400 for other repairs. Services are provided in a ratio of
2 screens to 1 other repair (2:1). Variable costs are 40% of selling price for iPhone screen repairs and 48% of
selling price for other repairs. Assume fixed costs are $2 billion per year for the repair services department.
Required
1. Compute the selling price per composite unit for Apple’s repair services.
2. Compute the variable cost per composite unit for Apple’s repair services.
3. How many composite units must Apple’s repair services department sell each year to break even?
4. At the break-even level, how many screen repairs and other repairs will Apple complete each year?
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