Midwest Manufacturing has had to downsize by about 25%. As a result, one of its warehouses is cur- rently unused. Insurance, security, and minimal heat- ing and lighting cost $170,000 per year. When it was in use, the facility costs for these items and normal maintenance were $425,000 per year. The building and land are valued at $3M. Midwest expects to begin using the warehouse again in 4 years. Another firm wants to lease the warehouse for 5 years with an option to renew. If Midwest uses an interest rate of 10%, what should the Midwest charge the firm? The firm will pay all costs for insurance, security, heating, lighting, and maintenance. If needed, Midwest can lease or build another warehouse for equivalent costs.
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.
Midwest Manufacturing has had to downsize by about 25%. As a result, one of its warehouses is cur- rently unused. Insurance, security, and minimal heat- ing and lighting cost $170,000 per year. When it was in use, the facility costs for these items and normal maintenance were $425,000 per year. The building and land are valued at $3M.
Midwest expects to begin using the warehouse again in 4 years. Another firm wants to lease the warehouse for 5 years with an option to renew. If Midwest uses an interest rate of 10%, what should the Midwest charge the firm? The firm will pay all costs for insurance, security, heating, lighting, and maintenance. If needed, Midwest can lease or build another warehouse for equivalent costs.
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