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 a. Calculate the break-even point for the year. ______ "bags" b. How many square yards of each product are expected to be sold at the break-even point? Oak: square yards Hickory: square yards Cherry: square yards c. If the company wants to earn pre-tax profit of $960,000, how many square yards of each type of flooring would it need to sell? How much total revenue would be required?
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 |
a. Calculate the break-even point for the year. ______ "bags"
b. How many square yards of each product are expected to be sold at the break-even point?
| Oak: | square yards | |
| Hickory: | square yards | |
| Cherry: | square yards |
c. If the company wants to earn pre-tax profit of $960,000, how many square yards of each type of flooring would it need to sell? How much total revenue would be required?
| Units | Revenue | ||
| Oak: | square yards | $ | |
| Hickory: | square yards | $ | |
| Cherry: | square yards | $ | |
| Total | $ |
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