Miller Company’s contribution format income statement for the most recent month is shown below: Total Per Unit Sales (43,000 units) $ 258,000 $ 6.00 Variable expenses 129,000 3.00 Contribution margin 129,000 $ 3.00 Fixed expenses 46,000 Net operating income $ 83,000 Required: (Consider each case independently): 1. What is the revised net operating income if unit sales increase by 17%? 2. What is the revised net operating income if the selling price decreases by $1.10 per unit and the number of units sold increases by 15%? 3. What is the revised net operating income if the selling price increases by $1.10 per unit, fixed expenses increase by $5,000, and the number of units sold decreases by 5%? 4. What is the revised net operating income if the selling price per unit increases by 20%, variable expenses increase by 30 cents per unit, and the number of units sold decreases by 6%?
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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Miller Company’s contribution format income statement for the most recent month is shown below:
| Total | Per Unit | |||||
| Sales (43,000 units) | $ | 258,000 | $ | 6.00 | ||
| Variable expenses | 129,000 | 3.00 | ||||
| Contribution margin | 129,000 | $ | 3.00 | |||
| Fixed expenses | 46,000 | |||||
| Net operating income | $ | 83,000 | ||||
Required:
(Consider each case independently):
1. What is the revised net operating income if unit sales increase by 17%?
2. What is the revised net operating income if the selling price decreases by $1.10 per unit and the number of units sold increases by 15%?
3. What is the revised net operating income if the selling price increases by $1.10 per unit, fixed expenses increase by $5,000, and the number of units sold decreases by 5%?
4. What is the revised net operating income if the selling price per unit increases by 20%, variable expenses increase by 30 cents per unit, and the number of units sold decreases by 6%?
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