b) Tara Company produces a single product. The projected income statement for the coming year is as follows: RM1,800,000 Sales (40,000 units @ RM45) Total variable cost 1,044,000 RM 756,000 Contribution margin Total fixed cost 733.320 Operating income RM 22,680 (Note: Round all RM value answers to the nearest dollar. Round contribution margin ratio and degree of operating leverage to two decimal places.) Required: i. Solve the break-even sales value (RM). ii. Solve the margin of safety in sales value (RM). iii. Solve the degree of operating leverage.
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.
Step by step
Solved in 3 steps
