İzmir Forwarding’s transport price for one pallet of paint is TL80/km. in a certain route. Variable costs per unit equal TL32. The company expects total fixed costs to be TL72,000 for the next month at the projected transport level of 2,000 pallets. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. a) Suppose management believes that a TL16,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by how much to cover additional expenditure? b) Suppose that management believes that a 10% decrease in the selling price will result in a 10% increase in sales. If this proposed decrease in selling price is implemented, compute the change in the operating income. c) Write an alternative action for the company your own, to improve the performance, compute the change in the operating income. d) Which alternative (A, B, C) should be chosen? Why?
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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