Peninsula Candy Company makes three types of candy bars: Chewy, Chunky, and Choco-Lite (Lite). Sales volume for the annual budget is determined by estimating the total market volume for candy bars and then applying the company's prior year market share, adjusted for planned changes due to company programs for the coming year. Volume is apportioned among the three bars based on the prior year's product mix, again adjusted for planned changes for the coming year. The following are the company budget and the results of operations for July. Chunky 2,000 bars $400 Choco-Lite Budget Sales-units (in thousands) Sales-dollars (in thousands) Variable costs Contribution margin Manufacturing fixed cost Product margin Chewy 2,000 bars $200 Total 4,000 bars $600 8,000 bars $1, 200 140 320 460 920 $ 60 $ 80 $140 24 280 40 40 60 140 $ 20 $ 40 $ 80 $4 140 Marketing and administrative costs (all fixed) 50 Operating profit 90 Actual Sales-units (in thousands) Sales-dollars (in thousands) Variable costs Contribution margin Chewy 1,600 bars $162 Chunky 2,000 bars $400 Total 7,800 bars $1,162 Choco-Lite 4,200 bars $600 112 322 464 898 $ 50 $ 78 $136 $ 264
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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