XYZ Entertainment Solutions Corporation manufactures and sells smart phones. Information on the prior year's operations (sales and production Model A1) is presented below: Sales price per unit P30 Costs per unit: Direct material 7 Direct labor 4 Overhead (50% variable) 6 Selling costs (30% variable) 10 Production in units 10,000 Sales in units 9,500
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.
XYZ Entertainment Solutions Corporation manufactures and sells smart phones. Information on the prior year's operations (sales and production Model A1) is presented below:
|
Sales price per unit |
P30 |
|
Costs per unit: |
|
|
Direct material |
7 |
|
Direct labor |
4 |
|
|
6 |
|
Selling costs (30% variable) |
10 |
|
Production in units |
10,000 |
|
Sales in units |
9,500 |
1. The Model B2 radio is currently in production and it renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are to be sold through regular channels, what is the minimum price the company would accept for the radios?
2. Refer to XYZ Entertainment Solutions Corporation. Assume that the remaining Model A1 radios can be sold through regular channels or to a foreign buyer for P6 per unit. Variable selling cost will not be incurred if sold to the foreign buyer. If sold through regular channels, the minimum acceptable price will be
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