The following operating information reports the results of Blue Spruce Company’s production and sale of 12,500 air-conditioned motorcycle helmets last year. Based on early market forecasts, Blue Spruce expects the same results this year. Sales $2,121,000 Variable manufacturing expenses 814,000 Fixed manufacturing expenses 276,000 Variable selling and administrative expenses 104,000 Fixed selling and administrative expenses 227,000 The American Motorcycle Club has offered to purchase 1,500 helmets at a price of $100 each. Blue Spruce has sufficient idle capacity to fill the order, which would not affect the company’s cost structure or regular sales.If Blue Spruce accepts this order, by how much will its income increase or decrease? Operating income will decreaseincrease by $ .
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 operating information reports the results of Blue Spruce Company’s production and sale of 12,500 air-conditioned motorcycle helmets last year. Based on early market
| Sales | $2,121,000 | ||
| Variable manufacturing expenses | 814,000 | ||
| Fixed manufacturing expenses | 276,000 | ||
| Variable selling and administrative expenses | 104,000 | ||
| Fixed selling and administrative expenses | 227,000 |
The American Motorcycle Club has offered to purchase 1,500 helmets at a price of $100 each. Blue Spruce has sufficient idle capacity to fill the order, which would not affect the company’s cost structure or regular sales.
If Blue Spruce accepts this order, by how much will its income increase or decrease?
| Operating income will
decreaseincrease
|
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