Total Per Unit % Sales $150,000 $30 ? Variable expenses ? ? ? Contribution margin ? ? ? Fixed expenses 13,500 Operating income $ 16,500 ......
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.
Ruby Company manufactures and sells a single product. The company’s sales and expenses for last year follow in the picture table below
- Fill in the missing numbers in the preceding table. Use the following questions to help fill in the missing numbers in the table:
- What is the total contribution margin?
- What is the total variable expense?
- How many units were sold?
- What is the per-unit variable expense?
- What is the per-unit contribution margin?
- Answer the following questions about breakeven analysis:
- What is the breakeven point in units?
- What is the breakeven point in sales dollars?
3. Answer the following questions about target profit analysis and safety margin:
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- How many units must the company sell in order to earn a profit of $48,000?
- Go back to the data given in the table. What is the current margin of safety in units?
- Again, go back to the data in the table. What is the margin of safety in sales dollars?
- Again, go back to the data in the table. What is the margin of safety in percentage?
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