Problem 1 The J. Page Furniture Company has the following information available regarding costs at various levels of monthly production: Production volume (units) 16,000 22,000 $96,250 $70,000 66,000 21,000 12,000 Direct materials Direct labor 90,750 Indirect materials 26,500 Supervisors' salaries 12,000 Depreciation on plant and equipment 10,000 10,000 32,000 17,000 3,200 4,000 $235,200 Maintenance 44,000 23,750 Utilities Insurance on plant and equipment 3,200 Property taxes on plant and equipment 4,500 Total $310,950 The company's total monthly production capacity is 30,000 units. Required a. Using the high-low method, develop a cost estimation equation for total monthly production costs using number of units produced as the "cost driver". b. Using your equation from b. above, predict total costs for a monthly production volume of 25,000 units. c. Average total cost for 16,000 units = ($235,200/16,000 units) = $14.69, conceptually, why shouldn't the company use the average cost of $14.69 to estimate total cost at 25,000 units of production? %3D d. If total productive capacity is 23,000 units, explain why we could not use this equation to make the prediction indicated in c. above, using our cost equation developed for this problem. e. What are the basic assumptions associated with cost, volume, profit analysis?
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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