Nature’s Own makes three types of wood flooring: Oak, Hickory, and Cherry. The company’s tax rate is 40 percent. The following costs are expected for the year: (See attached) Per-square-yard expected selling prices are as follows: Oak, $32.80; Hickory, $16.00; and Cherry, $50.00. The expected sales mix is as follows: Oak Hickory Cherry Square yards 10,800 86,400 7,200 d. If the company wants to earn an after-tax profit of $816,000, determine the revenue needed using the contribution margin percentage approach. $______ e. If the company achieves the revenue determined in (d), what is the (1) breakeven point in dollars, and the margin of safety (2) in dollars and (3) as a percentage Breakeven in dollars: $______ Margin of safety in dollars: $______ Margin of safety percentage: $______
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.
Nature’s Own makes three types of wood flooring: Oak, Hickory, and Cherry. The company’s tax rate is 40 percent. The following costs are expected for the year: (See attached)
Per-square-yard expected selling prices are as follows: Oak, $32.80; Hickory, $16.00; and Cherry, $50.00. The expected sales mix is as follows:
| Oak | Hickory | Cherry | |
| Square yards | 10,800 | 86,400 | 7,200 |
d. If the company wants to earn an after-tax profit of $816,000, determine the revenue needed using the contribution margin percentage approach. $______
e. If the company achieves the revenue determined in (d), what is the (1) breakeven point in dollars, and the margin of safety (2) in dollars and (3) as a percentage
Breakeven in dollars: $______
Margin of safety in dollars: $______
Margin of safety percentage: $______
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