The cost-volume-profit chart for Byron Manufacturing is shown in the screenshot. Use the graph to complete the sentences given below. Byron Manufacturing reaches its break-even level of activity when it sells _____________ (200, 400, 500, 600) units and generates __________ ($5,000, $10,000, $12,000, $15,000) in revenue, because at this level of activity the firm's revenue ____________ (is greater than, is less than, equals) its total cost. In addition, you can determine from the chart that Byron Manufacturing's fixed costs are ________ (5,000, $6,000, $10,000, $12,000) and its price per unit is __________ ($.04, $10.00, $24.00, $30.00) and variable cost per unit is __________ ($.04, $10.00, $12.00, $24.00) A. If fixed costs increase, what will happen to the break-even point? ______ a. The break-even point will increase. b. The break-even point will decrease. B. If the price per unit decreases, what will happen to the break-even point? ________ a. The break-even point will increase. b. The break-even point will decrease. CVP analysis is used to analyze the effects of changes in selling prices, costs and volume on profits. It is also used to determine target profit, the margin of safety, operating leverage, product mix and choosing among marketing strategies and others. Suppose Byron management has a target operating income of $3,000. Assume the same costs as above and the sell price remains at $24 per unit. c. How many units does Byron need to sell to meet this goal? _________ units
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.
CVP Analysis using a chart:
The cost-volume-profit chart for Byron Manufacturing is shown in the screenshot. Use the graph to complete the sentences given below.
Byron Manufacturing reaches its break-even level of activity when it sells _____________ (200, 400, 500, 600) units and generates __________ ($5,000, $10,000, $12,000, $15,000) in revenue, because at this level of activity the firm's revenue ____________ (is greater than, is less than, equals) its total cost.
In addition, you can determine from the chart that Byron
A. If fixed costs increase, what will happen to the break-even point? ______
a. The break-even point will increase.
b. The break-even point will decrease.
B. If the price per unit decreases, what will happen to the break-even point? ________
a. The break-even point will increase.
b. The break-even point will decrease.
CVP analysis is used to analyze the effects of changes in selling prices, costs and volume on profits. It is also used to determine target profit, the margin of safety, operating leverage, product mix and choosing among marketing strategies and others.
Suppose Byron management has a target operating income of $3,000. Assume the same costs as above and the sell price remains at $24 per unit.
c. How many units does Byron need to sell to meet this goal? _________ units
d. What is Byron's margin of safety in sales and in units when Byron sells 730 units?
Margin of safety in sales $____________
Margin of safety in units ______________
e. What is the degree of operating leverage when 730 units are sold? If required, round your answer to two decimal places. ______________
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