Bramble Company produces flash drives for computers, which it sells for $20 each. Each flash drive incurs $6 of variable costs during production. During April, 1220 drives were sold. Fixed costs for April were $4.20 per unit for a total of $5124 for the month. If variable costs decrease by 10%, what happens to the break-even level of units per month for Bramble Company? It depends on the number of units the company expects to produce and sell. It decreases by approximately 37 units. It decreases by approximately 15 units. It is 10% higher than the original break-even point.
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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