Audio-2-Go, Inc., manufactures MP3 players. Models A-1, A-2, and A-3 are small and light. They are attached to armbands and use flash memory. Models A-4 and A-5 are somewhat larger and use a built-in hard drive; they can be put into fanny packs for use while working out. It is now early January, and Audio-2-Go's budgeting team is finalizing the sales budget for this year. Sales in units and dollars for last year were as follows: Model Number Sold Price Revenue A-1 20,000 S 50 S1,000,000 А-2 30,000 50,000 75 2,250,000 4,500,000 А-3 A-4 90 15,000 120 1,800,000 A-5 2,000 200 400,000 $9,950,000
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.
In looking over last year’s sales figures, Audio-2-Go’s sales budgeting team recalled the
following:
a. Model A-1 costs were rising faster than the price could rise. Preparatory to phasing out this
model, Audio-2-Go, Inc., planned to slash advertising for this model and raise its price by
30 percent. The number of units of Model A-1 to be sold was
last year’s units.
b. Model A-5 was introduced on November 1 of last year. It contains a built-in 20 GB hard
drive and can be synchronized with several popular music software programs. Audio-2-Go
brought out this model to match competitors’ audio players, but the price is so much higher
than other Audio-2-Go products, that sales have been disappointing. The company plans to
discontinue this model on June 30 of this year, and thinks that monthly sales will remain at
last year’s level if the sales price remains unchanged.
c. Audio-2-Go plans to introduce Model A-6 on July 1 of this year. It will be a high-end player
that will be lighter and more versatile than Model A-5 (which it will replace). The target
price for this model is $180; unit sales are estimated to equal 2,500 per month.
d. A competitor has announced plans to introduce an improved version of Model A-3. Audio-2-Go
believes that the Model A-3 price must be cut 20 percent to maintain unit sales at last year’s level.
e. It was assumed that unit sales of all other models would increase by 10 percent, prices
remaining constant.
Required:
Prepare a sales forecast by product and in total for Audio-2-Go, Inc., for this year.
Step by step
Solved in 2 steps
