Leverage Faldo Company produces a single product. The projected income statement for the coming year, based on sales of 200,000 units, is as follows: Sales $2,000,000 Less: Variable costs 1,400,000 Contribution margin $600,000 Less: Fixed costs 450,000 Operating income $150,000 Required: Compute the unit contribution margin and the units that must be sold to break even. Suppose that 30,000 units are sold above the break-even point. What is the profit? Compute the contribution margin ratio and the break-even point in dollars. Suppose that revenues are $200,000 greater than expected. What would the total profit be? Compute the margin of safety in sales revenue. Compute the operating leverage. Compute the new profit level if sales are 20 percent higher than expected. How many units must be sold to earn a profit equal to 10 percent of sales? 6. Assume the income tax rate is 40 percent. How many units must be sold to earn an after-tax profit of $180,000?
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.
Leverage Faldo Company produces a single product. The
Sales $2,000,000
Less: Variable costs 1,400,000
Contribution margin $600,000
Less: Fixed costs 450,000
Operating income $150,000
Required:
- Compute the unit contribution margin and the units that must be sold to break even. Suppose that 30,000 units are sold above the break-even point. What is the profit?
- Compute the contribution margin ratio and the break-even point in dollars. Suppose that revenues are $200,000 greater than expected. What would the total profit be?
- Compute the margin of safety in sales revenue.
- Compute the operating leverage. Compute the new profit level if sales are 20 percent higher than expected.
- How many units must be sold to earn a profit equal to 10 percent of sales?
6. Assume the income tax rate is 40 percent. How many units must be sold to earn an after-tax profit of $180,000?
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