WHITNEY COMPANY Income Statement For the Year Ended December 31 Sales (45,000 units at $10 per unit) .. Less cost of goods sold: $450,000 .... ... Direct materials $90,000 Direct labor. Manufacturing overhead 78,300 98,500 266,800 Gross margin Less operating expenses: Selling expenses: Variable: 183,200 Sales commissions $27,000 Shipping 5,400 32,400 ... . Fixed (advertising, salaries) Administrative: 120,000 Variable (billing and other) Fixed (salaries and other) 1,800 48,000 202,200 Net operating loss $ (19,000)
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.
Whitney Company's board of director believes that the company's problem lies in adequate promotion. By how much can advertising be increased and still allow the company to earn a target profit of 4.5% on slaes of 60,00 units?
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