Calculate contribution margin and prepare an incremental analysis concerning retaining or dropping product to maximize operating income. 16p7.59B (LO 1, 6) Yars Company operates a small factory in which it manufactures two products: A and B. Production and sales results for last year were as follows: A 15,000 $80 Units sold Selling price per unit Variable costs per unit Fixed costs per unit 35 20 B 30,000 $60 30 20 For purposes of simplicity, the firm averages total fixed costs over the total number of units of A and B produced and sold. The research department has developed a new product (C) as a replacement for product B. Market studies show that Yars Company could sell 15,000 units of C at a price of $80; the variable costs per unit of Care $45. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year's results to be the same as last year's. Instructions Determine whether Yars Company should introduce product C next year. Explain why or why not. Show calculations to support your decision.
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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