Perfect Fit Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $50 with $35 in variable costs of goods sold. The company has fixed manufacturing costs of $2,250,000 and fixed marketing costs of $250,000. Sales commissions are paid to the wholesale sales reps at 10% of revenues. The company has an income tax rate of 20%. Q1. How many jeans must Perfect Fit sell in order to break even? Q2. How many jeans must the company sell in order to reach: a. a target operating income of $420,000? b. a net income of $420,000? Q3. How many jeans would Perfect Fit have to sell to earn the net income in requirement 2b if: (Consider each requirement independently.) a. the contribution margin per unit increases by 10%. b. the selling price is increased to $51.50. c. the company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 70% of fixed manufacturing costs.
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.
Perfect Fit Jeans Co. sells blue jeans wholesale to major retailers across the country. Each pair of jeans has a selling price of $50 with $35 in variable costs of goods sold. The company has fixed
Q1. How many jeans must Perfect Fit sell in order to break even?
Q2. How many jeans must the company sell in order to reach:
a. a target operating income of $420,000?
b. a net income of $420,000?
Q3. How many jeans would Perfect Fit have to sell to earn the net income in requirement 2b if: (Consider each requirement independently.)
a. the contribution margin per unit increases by 10%.
b. the selling price is increased to $51.50.
c. the company outsources manufacturing to an overseas company increasing variable costs per unit by $2.00 and saving 70% of fixed manufacturing costs.
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