Gilley, Inc., sells a single product. The company's most recent income statement is given below. Sales (4,000 units) $120,000 Less variable expenses (68,000) Contribution margin 52,000 Less fixed expenses (40,000) Profit $ 12,000 Required: a. Contribution margin per unit is $ ________ per unit b. If sales are doubled to $240,000, total variable costs will equal $ ________ c. If sales are doubled to $240,000, total fixed costs will equal $ ________ d. If 10 more units are sold, profits will increase by $ ________ e. Compute how many units must be sold to break even. # ________ f. Compute how many units must be sold to achieve profits of $20,000. # ________
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.
Gilley, Inc., sells a single product. The company's most recent income statement is given below.
Sales (4,000 units) $120,000
Less variable expenses (68,000)
Contribution margin 52,000
Less fixed expenses (40,000)
Profit $ 12,000
Required:
a. Contribution margin per unit is $ ________ per unit
b. If sales are doubled to $240,000,
total variable costs will equal $ ________
c. If sales are doubled to $240,000,
total fixed costs will equal $ ________
d. If 10 more units are sold, profits will increase by $ ________
e. Compute how many units must be sold to break even. # ________
f. Compute how many units must be sold
to achieve profits of $20,000. # ________
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