Meyerson's Bakery is considering the addition of a new line of pies to its product offerings. It is expected that each pie will sell for $15 and the variable costs per pie will be $9. Total fixed operating costs are expected to be $25,000. Meyerson's faces a marginal tax rate of 35%, will have interest expense associated with this line of $3,500, and expects to sell about 4,200 pies in the first year. a. Create an income statement for the pie line's first year. Is the line expected to be profitable? b. c. Calculate the operating break-even point in both units and dollars. How many pies would Meyerson's need to sell in order to achieve EBIT of $20,000? d. Use the Goal Seek tool to determine the selling price per pie that would allow Meyerson's to break even in terms of its net income. Calculate the DOL, DFL, and DCL for the new pie line. e.
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.
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