igelow Inc. sells a product for $1,200 per unit. The variable cost is $816 per unit, while fixed costs are $3,120,000. Determine (a) the break-even point in sales units and (b) the break-even point if the selling price were increased to $1,232 per unit. a. Break-even point in sales units units b. Break-even point if the selling price were increased to $1,232 per unit
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.
igelow Inc. sells a product for $1,200 per unit. The variable cost is $816 per unit, while fixed costs are $3,120,000.
Determine (a) the break-even point in sales units and (b) the break-even point if the selling price were increased to $1,232 per unit.
| a. Break-even point in sales units | units |
| b. Break-even point if the selling price were increased to $1,232 per unit |
Break even point is a point where total expenses are equal to total sales.
At break even point ,there will be no profit or loss to the company.
Contribution margin per unit = Sale price per unit - variable cost
= $1200-816
= $384
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