Your organization sells tables for $200 each. The fixed cost is $25,000 per annum with current demand at 700 tables per annum. Each table has a direct material cost of $65 and direct labour cost of $83. Required: A. I) what is profit based on the current demand? i) How many tables should be sold to get a profit of S5,000? A. The organization is considering two alternative proposals. i. Reducing selling price by 15% which is expected to increase demand by 10% ii. Increase selling price by 5% which is expected to reduce demand by 10% What will be the profits or loss under each alternative proposal?
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.
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