d) Assuming sales equal to the normal capacity calculated in a) above, prepare a contribution margin income statement for the year ended December 31, 2020, detailing the components of total variable costs and total fixed costs, and clearly showing contribution and net income. e) The recession in the economy in 2021 is expected to result in a reduction of the number of units sold. Assuming that Greek is operating at normal capacity, by how much can sales decline in units and sales dollars in 2021 without the company making a loss? f) The President of Greek Manufacturing is under pressure from shareholders to increase operating income by 30% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholders desired profit level. Is this a realistic goal?
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.
![Greek Manufacturing Company produces and sells a line of product that are sold usually all year round. The
company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the
business earned Operating Income of $600,000 in 2020. The following cost data has been prepared for the
year ended December 31, 2020.
Selling price per unit...
$50.00
Production Costs:
Direct Materials ...
$10.00
........
Direct Labour .
$8.00
........
Variable Manufacturing Overhead.
$7.00
Fixed Manufacturing Overhead....
Fixed Selling & Administrative Expenses...
Variable selling expense per unit ...
$450,000
$300,000
...... .....
$10.00
Required:
a)
Using the equation method, calculate the normal capacity of the business.
b)
Calculate:
i) the variable production cost per unit
ii) the total production cost per unit
iii) The total variable cost per unit
iv) Total Fixed Costs
c)
Calculate Greek's break-even point in units and in sales dollars.
d)
Assuming sales equal to the normal capacity calculated in a) above, prepare a contribution margin
income statement for the year ended December 31, 2020, detailing the components of total variable
costs and total fixed costs, and clearly showing contribution and net income.
The recession in the economy in 2021 is expected to result in a reduction of the number of units sold.
Assuming that Greek is operating at normal capacity, by how much can sales decline in units and sales
dollars in 2021 without the company making a loss?
f)
The President of Greek Manufacturing is under pressure from shareholders to increase operating
income by 30% in 2021. Management expects per unit data and total fixed costs to remain the same in
2021. Using the equation method, compute the number of units that would have to be sold in 2021 to
reach the shareholders desired profit level. Is this a realistic goal?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab89f2fd-2d90-4d55-9e01-3ab3450cbdbc%2F1c76f0c4-d3a6-4770-9912-aa59685856e1%2Ff5163k_processed.jpeg&w=3840&q=75)
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