Profit Planning and Sensitivity Analysis You are currently trying to decide between two coststructures for your business: one that has a greater proportion of short-term fixed costs and anotherthat is more heavily weighted to variable costs. Estimated revenue and cost data for each alternativeare as follows:Cost StructureAlternative 1 Alternative 2Selling price per unit $ 100 $ 100Variable cost per unit 85 80Short-term fixed costs per year 40,000 45,000Required1. What sales volume, in units, is needed for the total costs in each cost-structure alternative to be thesame?2. Suppose your profit goal for the coming year is 5% of sales (i.e., operating profit ÷ sales = 5%). Whatsales level in units is needed under each alternative to achieve this goal?3. Suppose again that your profit goal for the coming year is 5% of sales. What sales volume in dollars isneeded under each alternative to achieve this goal?
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.
Profit Planning and Sensitivity Analysis You are currently trying to decide between two cost
structures for your business: one that has a greater proportion of short-term fixed costs and another
that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternative
are as follows:
Cost Structure
Alternative 1 Alternative 2
Selling price per unit $ 100 $ 100
Variable cost per unit 85 80
Short-term fixed costs per year 40,000 45,000
Required
1. What sales volume, in units, is needed for the total costs in each cost-structure alternative to be the
same?
2. Suppose your profit goal for the coming year is 5% of sales (i.e., operating profit ÷ sales = 5%). What
sales level in units is needed under each alternative to achieve this goal?
3. Suppose again that your profit goal for the coming year is 5% of sales. What sales volume in dollars is
needed under each alternative to achieve this goal?
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