Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red, $20; white, $35; and blue, $65. The per unit variable costs to manufacture and sell these products are red, $12; white, $22; and blue, $50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual fixed costs shared by all three products are $250,000. One type of raw material has been used to manufacture all three products. The company has developed a new material of equal quality for less cost. The new material would reduce variable costs per unit as follows: red, by $6; white, by $12; and blue, by $10. However, the new material requires new equipment, which will increase annual fixed costs by $50,000. (Round answers to whole composite units.) Required 1. If the company continues to use the old material, determine its break-even point in both sales units and sales dollars of each individual product. 2. If the company uses the new material, determine its new break-even point in both sales units and sales dollars of each individual product.
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.
Patriot Co. manufactures and sells three products: red, white, and blue. Their unit selling prices are red,
$20; white, $35; and blue, $65. The per unit variable costs to manufacture and sell these products are red,
$12; white, $22; and blue, $50. Their sales mix is reflected in a ratio of 5:4:2 (red:white:blue). Annual
fixed costs shared by all three products are $250,000. One type of raw material has been used to manufacture
all three products. The company has developed a new material of equal quality for less cost. The new
material would reduce variable costs per unit as follows: red, by $6; white, by $12; and blue, by $10.
However, the new material requires new equipment, which will increase annual fixed costs by $50,000.
(Round answers to whole composite units.)
Required
1. If the company continues to use the old material, determine its break-even point in both sales units and
sales dollars of each individual product.
2. If the company uses the new material, determine its new break-even point in both sales units and sales
dollars of each individual product.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 6 images
