the cost of inputs. Finally, there is the 3rd OM option, which would reduce production costs by 25%. a. Which of the 3 options would you recommend to the firm if it can only pursue one option? b. What is the new profit for the 1st option? c. What is the new profit for the 2nd option?
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.
JW Computers is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable. Current financials for the firm are shown in the table below. In the 1st option, marketing will increase sales by 50%. The 2nd option is Vendor (Supplier) changes, which would result in a decrease of 10% in the cost of inputs. Finally, there is the 3rd OM option, which would reduce production costs by 25%.
a. Which of the 3 options would you recommend to the firm if it can only pursue one option?
b. What is the new profit for the 1st option?
c. What is the new profit for the 2nd option?
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