Old Man Joe sells playlists online. The projected current year a sales volume is 500,000 playlists. Old Man Joe has been selling the lists $10 each. The variable costs consist of the $5 unit (playlist) purchase price of the music rights. Old Man Joe's annual fixed costs are $200,000 (assume that 50% of the fixed costs are direct product costs and the remaining 50% are Selling&Administrative) and his company is subject to a 40 percent income tax rate. Calculate Old Man Joe Company's break-even point for the current year in the number of playlists and in total dollars. Include the formulas
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.
Old Man Joe sells playlists online. The projected current year a sales volume is 500,000 playlists. Old Man Joe has been selling the lists $10 each. The variable costs consist of the $5 unit (playlist) purchase price of the music rights. Old Man Joe's annual fixed costs are $200,000 (assume that 50% of the fixed costs are direct product costs and the remaining 50% are Selling&Administrative) and his company is subject to a 40 percent income tax rate. Calculate Old Man Joe Company's break-even point for the current year in the number of playlists and in total dollars. Include the formulas
Selling price per unit: It is the price at which a unit of product is sold in the market.
Variable cost per unit: It is the total cost of manufacturing a unit of product. It includes cost of direct materials, direct labor, and variable and fixed manufacturing overhead.
Contribution margin per unit: The contribution margin per unit is the excess of sales price over the variable cost per unit.
Fixed costs: These are costs which are incurred irrespective of the production or sale activities. It indicates that these costs are only incurred once and will not change with the change in the volume of goods produced or sold. These costs are constant in total but changes per unit. If the number of units produced is increasing, the fixed cost per unit will decrease and vice-versa.
Break-even point: It is the point at which the contribution margin earned on sales is equal to fixed costs or we can say that sales achieved is exactly sufficient to cover both the variable and fixed costs.
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