Treat each of the requirements as independent situations: a) Calculate the break-even point in units. b) What will the new break-even point be if fixed costs increase by 10 per cent?
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.
Lucid Images Ltd manufactures premium high definition televisions. The firm’s fixed costs are
$4,000,000 per year. The variable cost of each TV is $2,000, and the TVs are sold for $3,000 each. The
company sold 5,000 TVs during the previous year. (In the following requirements, ignore income taxes)
Required:
Treat each of the requirements as independent situations:
a) Calculate the break-even point in units.
b) What will the new break-even point be if fixed costs increase by 10 per cent?
c) What was the company’s net profit for the previous year? (4 marks)
d) The sales manager believes that a reduction in the sales price to $2,500 will result in orders for 1,200 more TVs each year. What will the break-even point be if the price is changed?
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