Division A makes a part with the following characteristics: Production capacity in units.................. 15,000 units Selling price to outside customers....... P30 Variable cost per unit............................. P20 Fixed cost per unit.................................. P4 Total fixed costs...................................... P60,000 Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of P 28 each. 1. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the P28 price internally, the company as a whole will be: A) worse off by P40,000 each period B) worse off by P20,000 each period. C) better off by P10,000 each period D) worse off by P30,000 each period. 2. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at P28 per unit (Division B's outside price), the company as a whole will be: A) better off by P20,000 each period. B) worse off by P10,000 each period. C) worse off by P40,000 each period. D) There will be no change in the status of the company as a whole.
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.
Division A makes a part with the following characteristics:
|
|
Production capacity in units.................. |
15,000 units |
|
|
Selling price to outside customers....... |
P30 |
|
|
Variable cost per unit............................. |
P20 |
|
|
Fixed cost per unit.................................. |
P4 |
|
|
Total fixed costs...................................... |
P60,000 |
Division B, another division of the same company, would like to purchase 5,000 units of the part each period from Division A. Division B is now purchasing these parts from an outside supplier at a price of P 28 each.
1. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division A refuses to accept the P28 price internally, the company as a whole will be:
A) worse off by P40,000 each period
B) worse off by P20,000 each period.
C) better off by P10,000 each period
D) worse off by P30,000 each period.
2. Suppose that Division A is operating at capacity and can sell all of its output to outside customers at its usual selling price. If Division A sells the parts to Division B at P28 per unit (Division B's outside price), the company as a whole will be:
A) better off by P20,000 each period.
B) worse off by P10,000 each period.
C) worse off by P40,000 each period.
D) There will be no change in the status of the company as a whole.
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