Malik started a travel luggage company selling only one style of luggage. It has just completed its first year of trading. The summary profit and loss account for the year is set out below: £ £ Sales (20,000 units) 1,280,000 Less: Direct Costs Direct Material 360,000 Direct Labour 320,000 Direct Expenses 80,000 Less: Fixed Expenses Overhead cost 541,000 1,301,000 Net Loss 21,000 The following information is available: all of the direct costs are variable with production the production overhead figure does not vary with the output. Required: (a) The break-even point in units and sales value. (b) Margin of Safety in Units. (c) The number of units needed to be sold to achieve a profit of £14,000.
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.
Malik started a travel luggage company selling only one style of luggage. It has just completed its first year of trading. The summary
|
|
£ |
£ |
|
Sales (20,000 units) |
|
1,280,000 |
|
Less: Direct Costs |
|
|
|
Direct Material |
360,000 |
|
|
Direct Labour |
320,000 |
|
|
Direct Expenses |
80,000 |
|
|
|
|
|
|
Less: Fixed Expenses |
|
|
|
|
541,000 |
1,301,000 |
|
Net Loss |
|
21,000 |
The following information is available:
- all of the direct costs are variable with production
- the production overhead figure does not vary with the output.
Required:
(a) The break-even point in units and sales value.
(b) Margin of Safety in Units.
(c) The number of units needed to be sold to achieve a profit of £14,000.
(d) special order was received at last minute to supply 5,000 units at a price of £60. Should the company accept this special order?
Explain your answer using appropriate calculations.
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(d) special order was received at last minute to supply 5,000 units at a price of £60. Should the company accept this special order?
by Bartleby ExpertThe company has set a profit objective of £24,000 for year 2. The following suggestion have been made as to how this profit could be achieved.
Reduce the selling price by £3 per unit and use a less expensive material that would reduce the direct material cost by £2 per unit
Required
For the above suggestion, calculate how many units need to be sold to achieve the profit objective of £24,000.
by Bartleby ExpertFor the above suggestion, calculate how many units need to be sold to achieve the profit objective of £24,000.
by Bartleby Expert
