The Metal Products Company produces a sewing machine that sells for Rs. 300. An increase of 15% in cost of materials and of 10% in cost of labour is anticipated. If the only figures available are given below, what must be the selling price to give the same percentage of gross profit as before ? (a) Material costs have been 45% of cost of sales. (b) Labour costs have been 40% of cost of sales. (c) Overhead costs have been 15% of cost of sales. The anticipated increased costs in relation to the present sale price would cause a 35% decrease~ in the amount of the present gross profit.
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 Metal Products Company produces a sewing machine that sells for Rs. 300. An increase of 15% in cost of materials and of 10% in cost of labour is anticipated. If the only figures available are given below, what must be the selling price to give the same percentage of gross profit as before ?
(a) Material costs have been 45% of cost of sales.
(b) Labour costs have been 40% of cost of sales.
(c)
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