Larson, Inc., manufactures backpacks. Last year, it sold 105,000 of its basic model for $20 per unit. The company estimates that this volume represents a 30 percent share of the current market. The market is expected to increase by 10 percent next year. Marketing specialists have determined that as a result of new competition, the company’s market share will fall to 25 percent (of this larger market). Due to changes in prices, the new price for the backpacks will be $17 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates.
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.
Exercise 13-26 (Algo) Estimate Sales Revenues (LO 13-3)
Larson, Inc., manufactures backpacks. Last year, it sold 105,000 of its basic model for $20 per unit. The company estimates that this volume represents a 30 percent share of the current market. The market is expected to increase by 10 percent next year. Marketing specialists have determined that as a result of new competition, the company’s market share will fall to 25 percent (of this larger market). Due to changes in prices, the new price for the backpacks will be $17 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates.
Required:
Estimate Larson’s sales revenues from this model of backpack for the coming year.
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