Revo, Inc. is considering changing its sales price of Product A which is presently P15. Increases and decreases of both 10% and 25%, as well as increases in advertising are being considered, with the following estimated results for coming year: Price Estimated units sales Estimated advertising -25% 200,000 P210,000 -10% 190,000 250,000 No Change 170,000 300,000 +10% 150,000 450,000 +25% 130,000 550,000 The company has the necessary flexibility in its production capacity to meet these volume levels. The variable manufacturing costs per unit is estimated to be P7.50 in coming year. REQUIRED: Determine the recommended sales price.
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.
Revo, Inc. is considering changing its sales price of Product A which is presently P15. Increases and decreases of both 10% and 25%, as well as increases in advertising are being considered, with the following estimated results for coming year:
| Price | Estimated units sales | Estimated advertising |
| -25% | 200,000 | P210,000 |
|
-10% |
190,000 | 250,000 |
| No Change | 170,000 | 300,000 |
| +10% | 150,000 | 450,000 |
|
+25% |
130,000 | 550,000 |
The company has the necessary flexibility in its production capacity to meet these volume levels. The variable
REQUIRED: Determine the recommended sales price.
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