Sales (54,600 units @ $34) $1,856,400 Total variable cost 1,064,700 Contribution margin $ 791,700 Total fixed cost 801,850 Operating income $ (10,150)
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.
Klamath Company produces a single product. The
year is as follows:
Required:
1. Compute the unit contribution margin and the units that must be sold to break even.
2. Suppose 10,000 units are sold above break-even. What is the operating income?
3. Compute the contribution margin ratio. Use the contribution margin ratio to compute
the break-even point in sales revenue. (Note: Round the contribution margin ratio to four
decimal places, and round the sales revenue to the nearest dollar.) Suppose that revenues
are $200,000 more than expected for the coming year. What would the total operating
income be?
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