Gyro Company manufactures Products T and W and is operating at full capacity. Manufacturing Product W requires three times the number of machine hours required for Product T. Market research indicates that 1,000 additional units of Product W could be sold. The contribution margin by unit of product is as follows: Product T Product W Sales price $300 $325 Variable cost of goods sold (235) (250) Manufacturing margin $65 $75 Variable selling and administrative expenses (25) (10) Contribution margin $40 $65 Determine the increase or decrease in total contribution margin if 1,000 additional units of Product W are produced and sold. $ Decrease or Increase
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.
Gyro Company manufactures Products T and W and is operating at full capacity. Manufacturing Product W requires three times the number of machine hours required for Product T.
| Product T | Product W | ||
| Sales price | $300 | $325 | |
| Variable cost of goods sold | (235) | (250) | |
| Manufacturing margin | $65 | $75 | |
| Variable selling and administrative expenses | (25) | (10) | |
| Contribution margin | $40 | $65 |
Determine the increase or decrease in total contribution margin if 1,000 additional units of Product W are produced and sold.
$ Decrease or Increase
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