Assume that you are in charge of pricing for a firm that produces pickles. You have fixed costs of $2,000,000. Variable costs are $0.75 per jar of pickles. You are selling your product to retailers for $0.89. You sell the pickles in cases of 24 jars per case. a. How many jars of pickles must you sell to break even? b. How much must you sell in dollars to break even? c. How many jars of pickles must you sell to break even plus make a profit of $300,000? d. Assume a retailer buys your product for $0.89. His business requires that he prices products with a 35 percent markup on cost. Calculate his selling price. e. Assume you have an MSRP of $1.39 for the pickles. If a retailer has a required 35 percent retailer margin on all products he sells, what is the most he is willing to pay the producer for the pickles? f. A clothing retailer knows that to break even and make a profit he needs to have a minimum retailer margin (also referred to as a contribution margin or gross margin) of at least 60 percent. If he is to sell a pair of shorts for the manufacturer’s suggested retail price of $49.99, what is the most he can pay the manufacturer for the shorts and maintain his margin? g. A salesperson is developing a quote for a quantity of disposable hospital gowns. His cost for each case of gowns is $85.00. His firm requires that he have a 20 percent margin so he is using a markup on selling price calculation to price the gowns. What will his quote be per case of gowns if he uses a 20 percent markup on selling price?
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.
Assume that you are in charge of pricing for a firm that produces pickles. You have fixed costs of $2,000,000.
Variable costs are $0.75 per jar of pickles. You are selling your product to retailers for $0.89. You sell the
pickles in cases of 24 jars per case.
a. How many jars of pickles must you sell to break even?
b. How much must you sell in dollars to break even?
c. How many jars of pickles must you sell to break even plus make a profit of $300,000?
d. Assume a retailer buys your product for $0.89. His business requires that he prices products with
a 35 percent markup on cost. Calculate his selling price.
e. Assume you have an MSRP of $1.39 for the pickles.
If a retailer has a required 35 percent retailer margin on all products he sells, what is the most he is
willing to pay the producer for the pickles?
f. A clothing retailer knows that to break even and make a profit he needs to have a minimum retailer
margin (also referred to as a contribution margin or gross margin) of at least 60 percent. If he is to sell a pair of shorts for the manufacturer’s suggested retail price of $49.99, what is the most he can pay
the manufacturer for the shorts and maintain his margin? g. A salesperson is developing a quote for a quantity of disposable hospital gowns. His cost for each case of gowns is $85.00. His firm requires that he have a 20 percent margin so he is using a markup on
selling price calculation to price the gowns. What will his quote be per case of gowns if he uses a 20 percent markup on selling price?
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