Breakeven volume before the proposed ad campaign Breakeven volume if ad campaign undertaken Minimum and maximum incremental profit if ad campaign undertaken
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.
Company XYZ has $2,500,000 in fixed costs. It sells products at an average selling price of $50.
Determine:
- Breakeven volume before the proposed ad campaign
- Breakeven volume if ad campaign undertaken
- Minimum and maximum incremental profit if ad campaign undertaken
- Would you support the proposal? Why or why not?
- Unit volume to achieve an operating profit of $800,000 assuming the ad campaign is undertaken
- Operating income at unit volume of 200,000 units assuming ad campaign is undertaken
- Margin of safety assuming volume of 200,000 units is achieved and ad campaign undertaken
- Incremental operating income if an additional 1,000 units are sold
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
