Naylor Company produces a product that has a variable cost of Rs. 13 per unit; the product sells for Rs. 28 per unit. The company’s annual fixed costs total Rs. 375,000; it had net income of Rs. 75,000 in the previous year. In an effort to increase the company’s market share, management is considering lowering the selling price to Rs. 25 per unit. Required: If Naylor desires to maintain net income of Rs. 75,000, how many additional units must it sell to justify the price decline?
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.
Naylor Company produces a product that has a variable cost of Rs. 13 per unit; the product sells for Rs. 28 per unit. The company’s annual fixed costs total Rs. 375,000; it had net income of Rs. 75,000 in the previous year. In an effort to increase the company’s market share, management is considering lowering the selling price to Rs. 25 per unit.
Required: If Naylor desires to maintain net income of Rs. 75,000, how many additional units must it sell to justify the price decline?
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