Benchmark Industries manufactures large workbenches for industrial use. Wally Garcia, the vice president for marketing at Benchmark, has concluded from his market analysis that sales are dwindling for Benchmark’s standard table because of aggressive pricing by competitors. Benchmark's table sells for P875 whereas the competition's comparable table is selling in the P800 range. Garcia has determined that dropping price to P800 is necessary to regain the firm's annual market share of 10,000 tables. Cost data based on sales of 10,000 tables are: Budgeted Amount 400,000 sq. ft. 85,000 hrs. 30,000 hrs: 320,000 hrs. Actual Amount Actual Cost 425,000 sq. ft. 100,000 hrs. 30,000 hrs. 320,000 hrs. Direct materials P2,700,000 1,000,000 300,000 4,000,000 Direct labor Machine setups Mechanical assembly
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.
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