Due to erratic sales of its sole product, a high capacity battery of laptop computers, QRS Sdn Bhd had been experiencing difficulty for some time. The company's contribution format income statement for the recent month is given below: RM Sales (@ RM35 per unit) 717,500 Variable Cost 574,000 Contribution margin 143,500 Fixed Cost 148,000 Net Operating Loss (4,500) Required: i. Compute the company's contruibution margin ratio and break - even point in both units and RM. ii. The company's CEO believes that a RM8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an RM70,000 increase in monthly sales. If the CEO is right, what will be the effect on the comoany's monthly net operating income or loss? iii. Refer to the original data. The sales manager is convinced that 10% reduction in selling price, combined with an increase of RM8,000 in the monthly advertising budget, will cause unit sales to double. What will new contribution format income statement look like if these changes are adopted?
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.
Due to erratic sales of its sole product, a high capacity battery of laptop computers, QRS Sdn Bhd had been experiencing difficulty for some time. The company's contribution format income statement for the recent month is given below:
RM
Sales (@ RM35 per unit) 717,500
Variable Cost 574,000
Contribution margin 143,500
Fixed Cost 148,000
Net Operating Loss (4,500)
Required:
i. Compute the company's contruibution margin ratio and break - even point in both units and RM.
ii. The company's CEO believes that a RM8,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an RM70,000 increase in monthly sales. If the CEO is right, what will be the effect on the comoany's monthly net operating income or loss?
iii. Refer to the original data. The sales manager is convinced that 10% reduction in selling price, combined with an increase of RM8,000 in the monthly advertising budget, will cause unit sales to double. What will new contribution format income statement look like if these changes are adopted?
iv. Refer to the original data. The marketing department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of RM9,750?
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