nformation: Revenues = Estimated at $1,000,000 for the upcoming year and anticipated to grow by 5% per year with different marketing tactics will employ. Expenses = $1,000,000 for the upcoming year and anticipated to decline to 95% of revenues each year thereafter as a result of the various cost efficiencies Struggle would put in place. Questions: XYZ is contemplating either the outright purchase today or a lease of a major piece of machinery and wants you to recommend which would be preferable – lease or buy. The following are the terms associated with each option: Purchase Price Option = $1,000,000 Incremental Borrowing Rate = 5% Estimated Life of Asset = 15 Years Lease Payments = $90,000/year for 15 Years with $1 Purchase Option at end of lease.
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.
Information:
Revenues = Estimated at $1,000,000 for the upcoming year and anticipated to grow by 5% per year with different marketing tactics will employ.
Expenses = $1,000,000 for the upcoming year and anticipated to decline to 95% of revenues each year thereafter as a result of the various cost efficiencies Struggle would put in place.
Questions:
- XYZ is contemplating either the outright purchase today or a lease of a major piece of machinery and wants you to recommend which would be preferable – lease or buy. The following are the terms associated with each option:
- Purchase Price Option = $1,000,000
- Incremental Borrowing Rate = 5%
- Estimated Life of Asset = 15 Years
- Lease Payments = $90,000/year for 15 Years with $1 Purchase Option at end of lease.
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