Menlo Company manufactures and sells a single product. The company’s revenue and expenses for the last quarter follow: Total Per Unit Revenue £ 450,000 £ 30 Less variable cost 180,000 12 Contribution margin 270,000 18 Less fixed cost 216,000 Profit £ 54,000 Required: (a) What is the quarterly break-even point in units sold and in revenue? (b) Without resorting to computations, what is the total contribution margin at the break-even point? (c) How many units would have to be sold each quarter to earn a target profit of £90,000? Use the unit contribution method. Verify your answer by preparing a contribution statement of profit or loss at the target level of revenue.
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.
Menlo Company manufactures and sells a single product. The company’s revenue and
expenses for the last quarter follow:
Total Per Unit
Revenue £ 450,000 £ 30
Less variable cost 180,000 12
Contribution margin 270,000 18
Less fixed cost 216,000
Profit £ 54,000
Required:
(a) What is the quarterly break-even point in units sold and in revenue?
(b) Without resorting to computations, what is the total contribution margin at the break-even point?
(c) How many units would have to be sold each quarter to earn a target profit of £90,000? Use the unit contribution method. Verify your answer by preparing a contribution statement of profit or loss at the target level of revenue.
Step by step
Solved in 4 steps with 1 images
