Chloe Enterprises operates a single-product entity. Data relating to the product for 2016 were as follows. Annual volume 32 000 units Selling price per unit $60 Variable manufacturing cost per unit 28 Annual fixed manufacturing costs 120000 Variable marketing and distribution costs per unit 12 Annual fixed non-manufacturing costs 360000 Required a. Calculate the break-even in both dollars and units for 2016. b. Calculate the margin of safety in both units and sales dollars. c. Calculate the profit achieved in 2016 given the annual volume of 32 000 units. d. Changes in marketing strategy are planned for 2017. This would increase variable marketing and distribution costs by $4 per unit, and reduce fixed nonmanufacturing costs by $80 000 per year. Calculate the units that would need to be sold in 2017 to achieve the same profit as in 2016.
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.
Chloe Enterprises operates a single-product entity. Data relating to the product for 2016
were as follows.
| Annual volume | 32 000 units |
| Selling price per unit | $60 |
| Variable manufacturing cost per unit | 28 |
| Annual fixed |
120000 |
| Variable marketing and distribution costs per unit | 12 |
| Annual fixed non-manufacturing costs | 360000 |
Required
a. Calculate the break-even in both dollars and units for 2016.
b. Calculate the margin of safety in both units and sales dollars.
c. Calculate the profit achieved in 2016 given the annual volume of 32 000 units.
d. Changes in marketing strategy are planned for 2017. This would increase variable
marketing and distribution costs by $4 per unit, and reduce fixed nonmanufacturing
costs by $80 000 per year. Calculate the units that would need to
be sold in 2017 to achieve the same profit as in 2016.
e. Would you recommend the change? Explain.
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