MARROW MUFFLERS Contribution Margin Income Statement Month Ended June 30, 2018 Net Sales Revenue (140 units x $250) $ 35,000 Variable Costs (140 units x $50) 7,000 Contribution Margin 28,000 Fixed Costs 11,500 Operating Income $ 16,500
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.
Computing degree of operating leverage
Following is the income statement for Marrow Mufflers for the month of June 2018:
Requirements
- Calculate the degree of operating leverage. (Round to four decimal places.)
- Use the degree of operating leverage calculated in Requirement 1 to estimate the change in operating income if total sales increase by 40% (assuming no change in sales price per unit). (Round interim calculations to four decimal places and final answer to the nearest dollar.)
- Verify your answer in Requirement 2 by preparing a contribution margin income statement with the total sales increase of 400%.
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