The Sock company buys hiking socks for GHS6 per pair and sells them for GHs 10. Management budgets monthly fixed costs of GHS 12.000 for sales volume between O and 12,000 pairs. Required: Consider the following questions separately by using the foregoing information each time. 1. The Sock Company plans to advertise in hiking magazines. The advertising campaign will increase total fixed costs by GHS2,000 per month. Calculate the new breakeven point in units. 2. In addition to selling hiking socks, the Sock Company would like to start selling sports socks. The Sock Company expects to sell one pair of hiking socks for every three pairs of sports socks. The Sock Company will buy the sports socks for GHS 4 per pair and sell them for GHS 8 per pair. Total fixed costs will stay at GHS 12,000 per month. Calculate the breakeven point in units for both hiking socks and sports socks
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 Sock company buys hiking socks for GHS6 per pair and sells them for GHs 10. Management budgets monthly fixed costs of GHS 12.000 for sales volume between O and 12,000 pairs.
Required:
Consider the following questions separately by using the foregoing information each time.
1. The Sock Company plans to advertise in hiking magazines. The advertising campaign will increase total fixed costs by GHS2,000 per month. Calculate the new breakeven point in units.
2. In addition to selling hiking socks, the Sock Company would like to start selling sports socks. The Sock Company expects to sell one pair of hiking socks for every three pairs of sports socks. The Sock Company will buy the sports socks for GHS 4 per pair and sell them for GHS 8 per pair. Total fixed costs will stay at GHS 12,000 per month. Calculate the breakeven point in units for both hiking socks and sports socks
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