KPR manufactures installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows: In Rs Amount Sales 80,000 Variable expenses 32,000 Contribution margin 48,000 Fixed expenses -38,000 Net operating income 10,000 Required: Compute the company’s degree of operating leverage. Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales. Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales.
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.
KPR manufactures installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:
In Rs
Amount
Sales
80,000
Variable expenses
32,000
Contribution margin
48,000
Fixed expenses
-38,000
Net operating income
10,000
Required:
Compute the company’s degree of operating leverage.
Using the degree of operating leverage, estimate the impact on net operating income of a 5% increase in sales.
Verify your estimate from part (2) above by constructing a new contribution format income statement for the company assuming a 5% increase in sales.
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