Tough Tough makes two products, Rock and Hard and details are as follows: Rock Hard £ £ Selling price 20 25 Unit variable costs 11 13 Standard ratio of sales 60% 40% . Fixed costs are estimated at £1.02 million for the year and Tough is currently forecasting to generate total sales revenue of £4.4 million. Required: Calculate the break-even point in terms of total units and sales revenue, based on the forecast ratio of sales above.
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.
Tough
Tough makes two products, Rock and Hard and details are as follows:
|
|
Rock |
Hard |
|
|
£ |
£ |
|
Selling price |
20 |
25 |
|
Unit variable costs |
11 |
13 |
|
|
||
|
Standard ratio of sales |
60% |
40% |
.
Fixed costs are estimated at £1.02 million for the year and Tough is currently
Required:
- Calculate the break-even point in terms of total units and sales revenue, based on the forecast ratio of sales above.
- Sketch a profit-volume chart showing the situation in (a); show on the same chart the effect of changing the sales mix to 50% Rock and 50% Hard (keeping total forecast revenue the same).
- The company has realised that £325,000 of the fixed costs are only incurred by product Rock. Calculate the sales revenue required from Rock in order to cover the attributable fixed costs and provide a net contribution of £800,000 towards general fixed costs and profit.
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