Sales volume for a company is million dollars per month. If the company spends $350,000 per month as fixed costs, and the variable costs are equal to ($0.5) from each revenue dollar Determine : A - Volume of production at break-even point? B - What is the effect of reducing variable costs by (25%) on nea profit (Z), if these increase was a result of updates in production lines that caused an increase in fixed costs by (10%). Note that sales volume not changed? C- What is the effect of reducing fixed costs by (10%) on net profia (Z), if this reduction causes an increase in variable costs by a similar percentage, given that sales volume not changed?
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.
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