Coney Adventures Inc. sells one product for $5. The variable cost per item is $3, and the fixed costs for the firm are $40. Assume that Redlands currently sells 40 units. Redlands estimates that if it increased sales price to $6 per unit demand would decrease by 10%. Determine if Redlands should increase its selling price. (Ignore income taxes.) Assume that Redlands currently sells 30 units and has a 40% income tax rate. The firm estimates that a $25 increase in fixed cost from automating the plant would lower variable costs to $2 per unit. Determine if Redlands should change its cost structure.
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.
Coney Adventures Inc. sells one product for $5. The variable cost per item is $3, and the fixed costs for the firm are $40.
- Assume that Redlands currently sells 40 units. Redlands estimates that if it increased sales price to $6 per unit demand would decrease by 10%. Determine if Redlands should increase its selling price. (Ignore income taxes.)
- Assume that Redlands currently sells 30 units and has a 40% income tax rate. The firm estimates that a $25 increase in fixed cost from automating the plant would lower variable costs to $2 per unit. Determine if Redlands should change its cost structure.
Coney Adventures Inc. sells its product at $ 5 per unit which has a variable cost of $ 3 and has a total fixed cost of $ 40.
Coney Adventures Inc. wants to increase its selling price to $ 6 under one option and in the second option, it wants to change its cost structure.
It wants to know that it would be profitable for the organization. Let see............
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