This month your vendor invoiced $31,500 in testing charges for your production run. The unit cost for testing is twice as much for each of the first 400 units per month as compared to each unit over 400. If we shipped 500 units to the vendor this month, find: (a) Average cost per unit; (b) Cost per unit below the price break point; (c) Marginal cost for the 650th unit. The Country Fields Retirement Community charges $6000/month for a single senior citizen to reside in an efficiency apartment with assisted living care. The facility has operating expenses of $600,000 per month. Staffing levels are dependent on the number of residents.
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.
This month your vendor invoiced $31,500 in testing charges for your production run. The unit cost for testing is twice as much for each of the first 400 units per month as compared to each unit over 400. If we shipped 500 units to the vendor this month, find: (a) Average cost per unit; (b) Cost per unit below the price break point; (c) Marginal cost for the 650th unit. The Country Fields Retirement Community charges $6000/month for a single senior citizen to reside in an efficiency apartment with assisted living care. The facility has operating expenses of $600,000 per month. Staffing levels are dependent on the number of residents.
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