K-9 Company produces and sells 2,000 units of a single product, a deluxe dog house. Selling price per unit $2,000 Variable cost per unit $1,000 Annual fixed cost $500,000 Assume that selling price per unit, variable cost per unit, and total fixed cost stay the same. Sales increase by 500 units to 2,500 units. The breakeven point will Ostay the same. O decrease. 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.
![### Question 17
#### Scenario:
K-9 Company produces and sells 2,000 units of a single product, a deluxe dog house.
| Parameter | Value |
|----------------------------|-----------|
| **Selling price per unit** | $2,000 |
| **Variable cost per unit** | $1,000 |
| **Annual fixed cost** | $500,000 |
#### Question:
Assume that the selling price per unit, variable cost per unit, and total fixed costs stay the same. If sales increase by 500 units to 2,500 units, the break-even point will:
- [ ] stay the same.
- [ ] decrease.
- [ ] increase.
### Options:
1. **Stay the same**.
2. **Decrease**.
3. **Increase**.
### Explanation:
The break-even point is defined as the point where total revenues equal total costs, which includes both fixed and variable costs. It is calculated as:
\[ \text{Break-even point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} \]
Given the data:
- Selling price per unit = $2,000
- Variable cost per unit = $1,000
- Annual fixed cost = $500,000
\[ \text{Contribution Margin per Unit} = \text{Selling Price per Unit} - \text{Variable Cost per Unit} \]
\[ \text{Contribution Margin per Unit} = $2,000 - $1,000 = $1,000 \]
\[ \text{Break-even Point (units)} = \frac{$500,000}{$1,000} = 500 \text{ units} \]
Since the selling price per unit, variable cost per unit, and total fixed costs stay the same, the break-even point in terms of units will also stay the same.
### Answer:
- **Stay the same.**](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5c8d4a85-4f6d-419d-9725-6a01dd6ff781%2F715610e2-3d7e-4e05-bedc-a2bea04cb743%2Fe24tljo_processed.jpeg&w=3840&q=75)
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