What must the new selling price per unit be if the company wishes to meet the shareholders desired profit level for 2020? Is this a viable option?
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.
Benoit Manufacturing Company manufactures and sells parts for various musical gadgets. The following
information to a single part which is used in the production of a wind instrument. The business earned
Operating Income of $220,000 in 2019, when production was 3,000 units and the president of Darius is under
pressure from shareholders to increase operating income in 2020 and is therefore considering the
implementation of strategies mainly geared at increasing revenues and or decreasing variable costs. Data for
variable cost per unit and total fixed costs were as follows:
Variable expenses per unit: Direct Material $58
Direct Labour $74
Variable Manufacturing
Fixed expenses: Fixed Manufacturing Overhead $215,000
Fixed Selling Costs $65,000
Fixed Administrative Costs $160,000
f) Assume that as a result of reorganizing the production process, the management of Benoit
Manufacturing was able to reduce direct material cost per unit by $5 due to a change in the supplier of
the raw material used in the production process. Variable manufacturing overhead per unit would also
decrease by $3. The business is also considering paying additional annual commission of $36,400 to
its sales team as part of the sales expansion effort, which should result in an increase in sales revenue.
The head of the marketing department has indicated that the effort of the sales team should result in a
5% increase in sales volume. What must the new selling price per unit be if the company wishes to
meet the shareholders desired profit level for 2020? Is this a viable option?
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