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.
Astro.Co sold 20,000 units of its only product and reported income of $25,000 for the current year. During a planning session for next year's activities, the production manager notes that variable costs can be reduced by 40% by installing a machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $241,000. The selling price per unit will not change.
Sales ($50 per unit): 1000000
Variable costs ($40 per unit): 800000
Contribution margin: 200000
Fixed costs 150000
Income 25000
1. Compute the break-even point in dollar sales for the next year assuming the machine is installed
2. Compute the sales level required in both dollars and units to earn $208000 of target income for the next year with the machine installed.
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