D&R Corp. has annual revenues of $262,000, an average contribution margin ratio of 33%, and fixed expenses of $101,800. Required: Management is considering adding a new product to the company's product line. The new item will have $8.7 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio. If the new product adds an additional $29,100 to D&R's fixed expenses, how many units of the new product must be sold at the price calculated in part a to break even on the new product? If 20,900 units of the new product could be sold at a price of $14.2 per unit, and the company's other business did not change, calculate D&R's total operating income and average contribution margin ratio.
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.
Exercise 12-16 (Algo) Calculate selling price of new product; what-if questions; breakeven LO 8, 9, 10, 11
D&R Corp. has annual revenues of $262,000, an average contribution margin ratio of 33%, and fixed expenses of $101,800.
Required:
- Management is considering adding a new product to the company's product line. The new item will have $8.7 of variable costs per unit. Calculate the selling price that will be required if this product is not to affect the average contribution margin ratio.
- If the new product adds an additional $29,100 to D&R's fixed expenses, how many units of the new product must be sold at the price calculated in part a to break even on the new product?
- If 20,900 units of the new product could be sold at a price of $14.2 per unit, and the company's other business did not change, calculate D&R's total operating income and average contribution margin ratio.
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