Rothko Ltd produces a single product for distribution to wholesalers. The product has a selling price of GH¢10 per unit. Variable costs of production are GH¢5 per unit, and fixed costs of production are GH¢50,000 per annum. The distribution of the product results in additional costs of GH¢1 per unit (variable) and GH¢11,500 per annum (fixed) 1. Calculate the expected break-even quantity and revenue. 2. Assuming Rothko Ltd predicts sales of GH¢200,000 for the year, calculate the expected profit (assuming sales and production are equal). 3. The company does have some idea about the effects on demand of changes in prices, advertising, competitors’ action, e Assume that a 5% decrease in price will increase total volume by 15% (in units); that an additional expenditure of GH¢7,500 on advertising will further increase the original volume by 5%, but that the increased production will result in an increase in variable costs of production by GH¢0.1 per unit in excess of 21,000 unit. Maximum practical capacity is 25,000 units. What effect will these changes have on net profit?
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.
Rothko Ltd produces a single product for distribution to wholesalers. The product has a selling price of GH¢10 per unit. Variable costs of production are GH¢5 per unit, and fixed costs of production are GH¢50,000 per annum. The distribution of the product results in additional costs of GH¢1 per unit (variable) and GH¢11,500 per annum (fixed)
1. Calculate the expected break-even quantity and revenue.
2. Assuming Rothko Ltd predicts sales of GH¢200,000 for the year, calculate the expected profit (assuming sales and production are equal).
3. The company does have some idea about the effects on demand of changes in prices, advertising, competitors’ action, e Assume that a 5% decrease in price will increase total volume by 15% (in units); that an additional expenditure of GH¢7,500 on advertising will further increase the original volume by 5%, but that the increased production will result in an increase in variable costs of production by GH¢0.1 per unit in excess of 21,000 unit. Maximum practical capacity is 25,000 units. What effect will these changes have on net profit?
4. As an alternative, Rothko Ltd can also expand its sales volume by 20% by offering its wholesalers a rebate of 1% on all the units they purchase, and by incurring advertising expenditure of GH¢20,0
5. Is this a better alternative than (3)? Support your reasoning with calculations.
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