Calculate the break-even both in units and sales value using the contribution margin method for Xerox Ltd for the year 2020. Calculate the margin of safety for Xerox Ltd assuming that the actual sales for the year 2020 is as given in the above income statement (i.e Shs 12,000,000). The cost accountant found out that a Fixed Research and Development overhead cost of Shs 255,000 was not included in the income statement projections for the year 2020 that is provided above. Using the information provided in the income statement provided above together with the additional Fixed Research and Development overhead cost of Shs 255,000 Calculate the number of Units (T-Shirts) that the Xerox ltd will have to produce and sell to earn a target profit of Shs 10,000,000.
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.
Required:
- Calculate the break-even both in units and sales value using the contribution margin method for Xerox Ltd for the year 2020.
- Calculate the margin of safety for Xerox Ltd assuming that the actual sales for the year 2020 is as given in the above income statement (i.e Shs 12,000,000).
The cost accountant found out that a Fixed Research and Development overhead cost of Shs 255,000 was not included in the income statement projections for the year 2020 that is provided above. Using the information provided in the income statement provided above together with the additional Fixed Research and Development overhead cost of Shs 255,000 Calculate the number of Units (T-Shirts) that the Xerox ltd will have to produce and sell to earn a target profit of Shs 10,000,000.
The break-even sales are the sales where the business earns no profit no loss during the period.
The break-even sales are calculated as fixed costs divided by the contribution margin ratio.
The contribution margin is calculated as the difference between sales and variable costs.
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