Toy Plc. makes special toy cars which it sells to retailers for K25, 000 per toy car. Retailers sell the toy cars to consumers for K40, 000 each. Budgeted information for the following year: Production and sales 200, 000 toy cars Fixed overhead K2, 400, 000, 000 Variable costs per toy car K6, 500 Recently, the retailer has started using their buyer power over Toy Plc. demanding a discount off the existing price charged to them. Directors of Toy plc. fear that they may lose business if they do not offer some discount to their customers and have asked for advice from a market research consultancy firm. The consultants have suggested that Toy plc. need to reduce the selling price charged to retailers by a minimum of 10% if they are to retain existing customers. The consultants however, believe that Toy plc. can use some buyer power of their own over the suppliers of materials such that the variable cost per toy car would fall by 5%. Based upon the existing selling price and variable cost per toy car: Calculate the breakeven point in units and value Calculate the margin of safety as a percentage of budgeted sales volume and explain its meaning to Toy plc. directors
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.
Toy Plc. makes special toy cars which it sells to retailers for K25, 000 per toy car. Retailers sell the toy cars to consumers for K40, 000 each.
Budgeted information for the following year:
Production and sales 200, 000 toy cars
Fixed
Variable costs per toy car K6, 500
Recently, the retailer has started using their buyer power over Toy Plc. demanding a discount off the existing price charged to them. Directors of Toy plc. fear that they may lose business if they do not offer some discount to their customers and have asked for advice from a
The consultants have suggested that Toy plc. need to reduce the selling price charged to retailers by a minimum of 10% if they are to retain existing customers. The consultants however, believe that Toy plc. can use some buyer power of their own over the suppliers of materials such that the variable cost per toy car would fall by 5%.
Based upon the existing selling price and variable cost per toy car:
- Calculate the breakeven point in units and value
- Calculate the margin of safety as a percentage of budgeted sales volume and explain its meaning to Toy plc. directors
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