Sunland Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2022, is as follows. SUNLAND BEAUTY CORPORATION Income Statement For the Year Ended December 31, 2022 Sales $71,200,000 Cost of goods sold
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.
Sunland Beauty Corporation manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 21% of sales. The income statement for the year ending December 31, 2022, is as follows.
|
SUNLAND BEAUTY CORPORATION |
||||
|---|---|---|---|---|
|
Sales |
$71,200,000 | |||
|
Cost of goods sold |
||||
|
Variable |
$30,616,000 | |||
|
Fixed |
8,560,000 | 39,176,000 | ||
|
Gross profit |
$32,024,000 | |||
|
Selling and marketing expenses |
||||
|
Commissions |
$14,952,000 | |||
|
Fixed costs |
10,660,400 | 25,612,400 | ||
|
Operating income |
$6,411,600 |
The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 7% and incur additional fixed costs of $9,968,000.
Calculate the company’s break-even point in sales dollars for the year 2022 if it hires its own sales force to replace the network of agents.
| Break-even point |
enter the breakeven point in dollars |
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