Menlo Company manufactures and sells a single product. The following information has been provided to you: Profit and loss account for the year ended 31 Dec 2017: £ £ £ Sales 3,000,000 Production costs: Direct materials 300,000 Direct labour 1,387,500 Variable overhead 150,000 Fixed overhead 525,000 Total production costs: 2,362,500 Fixed administration overhead 240,000 Selling and distribution costs: Sales commission (2% of sales) 60,000 Variable distribution costs 127,500 Fixed advertising costs 90,000 277,500 2,880,000 Profit 120,000 The company sold 150,000 units last year at a selling price of £20.00 per unit. Required: As the company’s newly appointed management accountant, you are asked to calculate: (a) Total contribution for 2017. (b) Break-even point in units. (c) The number of units the company would have to sell to make a net 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.
Menlo Company manufactures and sells a single product. The following information has been provided to you:
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£ |
£ |
£ |
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| Sales | 3,000,000 | |||
|
|
Production costs: |
|||
|
|
Direct materials |
300,000 | ||
|
|
Direct labour |
1,387,500 | ||
|
|
Variable |
150,000 | ||
|
|
Fixed overhead |
525,000 | ||
|
|
Total production costs: |
2,362,500 | ||
|
|
Fixed administration overhead |
240,000 | ||
|
|
Selling and distribution costs: |
|||
|
|
Sales commission (2% of sales) |
60,000 | ||
|
|
Variable distribution costs |
127,500 | ||
|
|
Fixed advertising costs |
90,000 | ||
|
|
277,500 | |||
|
|
2,880,000 | |||
|
|
Profit | 120,000 | ||
|
|
||||
|
|
The company sold 150,000 units last year at a selling price of £20.00 per unit.
Required:
As the company’s newly appointed
(a) Total contribution for 2017.
(b) Break-even point in units.
(c) The number of units the company would have to sell to make a net profit of £180,000.
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