refer to the orginal data. Compute the company's margin of safety in both dollar and percentage terms. 5.) what is the company's CM ratio? If the company can sell more units thereby increasing sales by $50000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase
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.
4.) refer to the orginal data. Compute the company's margin of safety in both dollar and percentage terms.
5.) what is the company's CM ratio? If the company can sell more units thereby increasing sales by $50000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?
Answer 4)
Calculation of Margin of Safety in Dollars
Margin of Safety in Dollars = Current Sales – Breakeven Sales
Margin of Safety in Dollars = $ 450,000 – $ 360,000
Margin of Safety in Dollars = $ 90,000
Final Answer: Margin of Safety is $ 90,000.
Calculation of Margin of Safety in Percentage
Margin of Safety in Percentage = Margin of Safety in Dollars/ Current Sales
Margin of Safety in Percentage = $ 90,000/ $ 450,000
Margin of Safety in Percentage = 20%
Final Answer: Margin of Safety is 20%.
Working Notes:
Calculation of Contribution Margin Ratio
Contribution margin Ratio = Contribution margin per unit/ Selling price per unit
Contribution margin Ratio = 18 per unit/ $ 30 per unit
Contribution margin Ratio = 60%
Calculation of Break-even point in dollars
Break-even point in dollars = Fixed Expenses/ Contribution margin ratio
Break-even point in dollars = $ 216,000/ 60%
Break-even point in dollars = $ 360,000
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