The following is Alsatia Corporation's contribution format income statement for last month: The company has no beginning or ending inventories and produced and sold 10,000 units during the month. Required: What is the company's contribution margin ratio? What is the company's break-even in units? If sales increase by 100 units, by how much should net operating income increase?
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.
The following is Alsatia Corporation's contribution format income statement for last month:
The company has no beginning or ending inventories and produced and sold 10,000 units during the month.
Required:
- What is the company's contribution margin ratio?
- What is the company's break-even in units?
- If sales increase by 100 units, by how much should net operating income increase?
- How many units would the company have to sell to attain target profits of $225,000?
- What is the company's margin of safety in dollars?
- What is the company's degree of operating leverage?
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