Ozark Metal Co. makes a single product that sells for $43 per unit. Variable costs are $29.8 per unit, and fixed costs total $65,500 per month. Required: a. Calculate the number of units that must be sold each month for the firm to break even, b. Assume current sales are $406,000. Calculate the margin of safety and the margin of safety ratio. c. Calculate operating income if 6,700 units are sold in a month. d. Calculate operating income if the selling price is raised to $46 per unit, advertising expenditures are increased by $7,500 per month, and monthly unit sales volume becomes 7,400 units. e. Assume that the firm adds another product to its product line and that the new product sells for $21 per unit, has variable costs of $15 per unit, and causes fixed expenses in total to increase to $88,000 per month. Calculate the firm's operating income if 6,700 units of the original product and 4,900 units of the new product are sold each month. For the original product, use the selling price and variable cost data given in the problem statement. f. Calculate the firm's operating income if 3,800 units of the original product and 7,800 units of the new product are sold each month.
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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