Sports-Reps, Inc., represents professional athletes and movie and television stars. The agencyhad revenue of $12,345,000 last year, with total variable costs of $5,678,700 and fixed costs of$2,192,400.Required:1. What is the contribution margin ratio for Sports-Reps based on last year’s data? What is thebreak-even point in sales revenue?2. What was the margin of safety for Sports-Reps last year?3. One of Sports-Reps’s agents proposed that the firm begin cultivating high school sports starsaround the nation. This proposal is expected to increase revenue by $230,000 per year, withincreased fixed costs of $122,500. Is this proposal a good idea? Explain.
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.
Sports-Reps, Inc., represents professional athletes and movie and television stars. The agency
had revenue of $12,345,000 last year, with total variable costs of $5,678,700 and fixed costs of
$2,192,400.
Required:
1. What is the contribution margin ratio for Sports-Reps based on last year’s data? What is the
break-even point in sales revenue?
2. What was the margin of safety for Sports-Reps last year?
3. One of Sports-Reps’s agents proposed that the firm begin cultivating high school sports stars
around the nation. This proposal is expected to increase revenue by $230,000 per year, with
increased fixed costs of $122,500. Is this proposal a good idea? Explain.
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