In 200A, the company’s sales was P500,000. Its fixed costs amounts to P100,000 per year. In 200B, sales was higher, while profit was P30,000 higher than the 200A figures. For 200C, the company expects to have sales that is twice as much as the 200A sales. The expected increase in production to meet the sales demand in 200C will not require the company exceed its normal capacity. Required: How can you show that the company’s contribution margin ratio is 30% How can you show that the profit the company expect to earn in 200C is 200,000 Can you determine the company’s break-even point in units?
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.
In 200A, the company’s sales was P500,000. Its fixed costs amounts to P100,000 per year. In 200B, sales was higher, while profit was P30,000 higher than the 200A figures.
For 200C, the company expects to have sales that is twice as much as the 200A sales. The expected increase in production to meet the sales demand in 200C will not require the company exceed its normal capacity.
Required:
- How can you show that the company’s contribution margin ratio is 30%
- How can you show that the profit the company expect to earn in 200C is 200,000
- Can you determine the company’s break-even point in units?
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