Baqar, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company’s contribution format income statement for the most recent month is given below: Sales (13,500 units at $20 per unit) 270,000 Less: Variable Expenses (189,000) Contribution Margin 81,000 Less: Fixed Expenses (90,000) Net Profit (9000) Required: Compute the company’s CM ratio and its break-even point in both units and dollars.
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.
Baqar, Inc., produces memory enhancement kits for fax machines. Sales have been very erratic, with some months showing a profit and some months showing a loss. The company’s contribution format income statement for the most recent month is given below:
Sales (13,500 units at $20 per unit) 270,000
Less: Variable Expenses (189,000)
Contribution Margin 81,000
Less: Fixed Expenses (90,000)
Net Profit (9000)
Required:
- Compute the company’s CM ratio and its break-even point in both units and dollars.
- Refer to the original data. The president is convinced that a 10% reduction in the selling price, combined with an increase of $35,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?
- How many units must be sold in order to earn profit of $15,000?
- Calculate Degree of Operating Leverage of the company. If the sales of the company increased by 20%. How much profit will be increased? Proof your answer.
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