Package contribution margin Package contribution margin ratio Break-even point in 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.
- The MIC Company s Avon and Bona. MIC sells these products at the rate of 2 units of Avon and 3 units of Bona. The contribution margin per unit of Avon is P4 and of Bona is P2. MIC has a total fixed costs of P420,000. The selling price of Avon is P10 and Bona is P8.
Compute the following:
- Package contribution margin
- Package contribution margin ratio
- Break-even point in units
- Break-even point in peso sales
- Break-even point for each product.
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