oduct Line Elimination Quiet Feet Inc. produces three different types of shoes. Complete the below contribution margin income statement for each product line. Allocate total fixed costs to each shoe type based on units as a percent of total units (i.e. use units sold as the cost driver). Boots Sneakers Sandals Total 15,000 4,000 Sales (units) Price 6,000 50.00 $ $ 25.00 $ 5.00 Sales revenue Variable costs 180,000 315,000 24,000 Contribution margin Fixed costs (all allocated) Operating income hat is operating income if Quiet Feet Inc. stopped selling Boots? hat is operating income if Quiet Feet Inc. stopped selling Sneakers? hat is operating income if Quiet Feet Inc. stopped selling Sandals? hat product line (if any) should Quiet Feet Inc. stop producing? 25,000 IW 519,000 119,900 Relevant?
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.
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