Orange County Inc. sells its only product for $5 per unit. The variable cost per unit is $3 and the firm has fixed costs totaling $400. Round to the nearest dollar and do not include dollar signs or commas. 1. Compute the number of units Orange County must sell to break even. _____ units 2. Determine sales revenue (in dollars) if the firm plans $250 pretax profit. $ _____ 3. Compute the number of units Orange County must sell if it plans to earn $180 net income and has a 40% income tax rate. _____ units
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.
Orange County Inc. sells its only product for $5 per unit. The variable cost per unit is $3 and the firm has fixed costs totaling $400. Round to the nearest dollar and do not include dollar signs or commas.
1. Compute the number of units Orange County must sell to break even. _____ units
2. Determine sales revenue (in dollars) if the firm plans $250 pretax profit. $ _____
3. Compute the number of units Orange County must sell if it plans to earn $180 net income and has a 40% income tax rate. _____ units
4. Ignoring income taxes, determine sales revenue (in dollars) if the firm wants to earn an 8% profit margin. $ _____
5. Assume that Orange County expects to earn $300 of pretax profit under its original assumptions (selling price $5, variable cost $3, and fixed costs $400) by selling 350 units. The firm can decrease its fixed costs to $200 if it is willing to increase variable cost to $3.50 per unit. Should the company change its cost structure? y/N? , new cost structure = $ ____ profit, old cost structure = $ ____ profit
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