Help Save & Exit A company purchases fruit from farmers for $2.00 a pound. The fruit can be sold for $3.20 a pound or it can be used to make jelly. Each case of jelly contains three-quarters of a pound of fruit and can be sold for $4.40. In addition to the cost of the fruit, making and selling each case of jelly incurs additional variable costs of S1.10 per unit. The monthly fixed costs associated with making the jelly include: Jelly production salaries Depreciation of jelly-making equipment Salary of salesperson dedicated to selling jelly $4,000 400 2,000 Total fixed costs $6,400 The jelly-making equipment does not wear out through use and it has no resale value. Assuming the company makes and sells 8,000 cases of Jelly, what is the financial advantage (disadvantage) of continuing to process fruit into jelly?
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.
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