no handwriting please show working French Manufacturing Company produces and sells a line of products that are sold usually all year round. The The company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the The business earned an Operating Income of $600,000 in 2020. The following cost data has been prepared for the The year ended December 31, 2020. Selling price per unit……………………………………… $50.00 Production Costs: Direct Materials …………………………………. $10.00 Direct Labor ……………………………………. $8.00 Variable Manufacturing Overhead ……………. $7.00 Fixed Manufacturing Overhead…………....................... $450,000 Fixed Selling & Administrative Expenses……………… $300,000 Variable selling expense per unit ………………………. $10.00
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.
no handwriting please show working
French Manufacturing Company produces and sells a line of products that are sold usually all year round. The
The company has a maximum production capacity of 100,000 units per year. Operating at normal capacity, the
The business earned an Operating Income of $600,000 in 2020. The following cost data has been prepared for the
The year ended December 31, 2020.
Selling price per unit……………………………………… $50.00
Production Costs:
Direct Materials …………………………………. $10.00
Direct Labor ……………………………………. $8.00
Variable Manufacturing
Fixed Manufacturing Overhead…………....................... $450,000
Fixed Selling & Administrative Expenses……………… $300,000
Variable selling expense per unit ………………………. $10.00
Required:
- Using the equation method, calculate the normal capacity of the business.
- The President of French Manufacturing is under pressure from shareholders to increase operating income by 30% in 2021. Management expects per unit data and total fixed costs to remain the same in 2021. Using the equation method, compute the number of units that would have to be sold in 2021 to reach the shareholder’s desired profit level. Is this a realistic goal?
- French’s management team is concerned about the selling expenses associated with the product and wants to reduce the variable selling expense per unit by 30%, which will see a simultaneous reduction in the total fixed selling expenses by $30,000. If they are able to accomplish this feat, it is expected that sales volume for the year will fall by 16⅔% below normal capacity. What must the new selling price per unit be if the company wishes to meet the shareholders’ profit objective for 2021? How will these changes impact the percentage margin of safety?
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