Part A Smart Swim Ltd manufactures and sells swimsuits for $40 each. The estimated income statement for 2020 is as follows: Sales $2,000,000 Variable costs (1,100,000) Contribution margin 900,000 Fixed costs (765,000) Pre-tax profit $135,000 Required: Show all your workings. i. Calculate the company’s break-even point in units of swimsuits and sales dollars for 2020. ii. Calculate the company’s margin of safety in the units of swimsuits. iii. Assume the margin of safety in 2019 was 5,000 units of swimsuits. Are the company’s operations more or less risky in 2020 as compared to 2019? Explain.
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.
Part A
Smart Swim Ltd manufactures and sells swimsuits for $40 each. The estimated income statement
for 2020 is as follows:
Sales $2,000,000
Variable costs (1,100,000)
Contribution margin 900,000
Fixed costs (765,000)
Pre-tax profit $135,000
Required:
Show all your workings.
i. Calculate the company’s break-even point in units of swimsuits and sales dollars for 2020.
ii. Calculate the company’s margin of safety in the units of swimsuits.
iii. Assume the margin of safety in 2019 was 5,000 units of swimsuits. Are the company’s
operations more or less risky in 2020 as compared to 2019? Explain.
iv. Assume 2020’s actual sales revenue is $200,000 higher than the projected sales. Calculate
the actual pre-tax profit of 2020 assuming the unit selling price, the unit variable cost and the
total fixed costs remain constant.
v. Assume a tax rate of 40%. Calculate the units of swimsuits that must be sold to earn an aftertax profit of $180,000 assuming the unit selling price, the unit variable cost and the total fixed
costs remain constant? Round your answer to the nearest unit of swimsuit.
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