Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no
To compute: The financial advantage of investing additional capital of $80,000 in fixed selling expense.
Answer to Problem 6.18P
Explanation of Solution
Particular | Amount $ |
Sales | 2,400,000 |
Less: Variable expense | |
Direct materials | 750,000 |
Direct labor | 337,500 |
Variable manufacturing | 172,500 |
Variable selling expenses | 90,000 |
Contribution margin | 1,050,000 |
Less: fixed expense | |
Fixed manufacturing overhead | 300,000 |
Fixed selling expense | 290,000 |
Net income | 460,000 |
Less: net income under current policy | 330,000 |
Incremental net income | 130,000 |
Unit product cost for both years by using super variable costing would include direct materials of $19 per unit. Net operating income for year is $8,000.
Increase in fixed selling expense will lead to increase in sales from current policy of 60000 units to 75000 units. Increase in sales and the fixed selling expense will lead to increase the net income by $130000
Thus increased fixed selling expense is justified
The net income under the current policy of selling 60000 units as shown below:
Particular | Amount $ |
Sales | 1920000 |
Less: Variable expense | |
Direct materials | 600000 |
Direct labor | 270000 |
Variable manufacturing overhead | 138000 |
Variable selling expenses | 72000 |
Contribution margin | 840000 |
Less: fixed expense | |
Fixed manufacturing overhead | 300000 |
Fixed selling expense | 210000 |
Net income | 330000 |
Hence the net income under the current policy of selling 60000 units is $330,000
Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.
To compute: The break-even price per unit
Answer to Problem 6.18P
The per unit break-even price on the order is $22.15
Explanation of Solution
Per unit break-even price on the order:
Particular | Amount $ |
Direct material per unit | 10 |
Add: direct labor per unit | 4.50 |
Add: variable manufacturing overhead | 2.30 |
Add: variable selling expense | 3.20 |
Add: import duties per unit | 1.70 |
Add: permit and license per unit () | 0.45 |
Per unit break-even price | $22.15 |
Thus, the per unit break-even price on the order is $22.15
Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.
To compute: The unit cost figure that is relevant for setting a minimum selling price.
Answer to Problem 6.18P
The relevant cost per unit is $1.20.
Explanation of Solution
The relevant cost of the units that are considered to be seconds is the variable selling expense. Direct material, direct labor and variable manufacturing overhead costs are already incurred. It implies all the three costs are sunk cots. Thus the relevant cost per unit is $1.20.
Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.
To compute: The total contribution margin, total fixed cost, financial advantage and the effect closing the plant for two month.
Answer to Problem 6.18P
The fixed selling expense to be incurred on closing the plant is $28,000.
Explanation of Solution
The impact on profit of closing the plant as:
Particular | Amount $ | Amount $ |
Contribution margin lost | 42000 | |
Fixed costs: | ||
Fixed manufacturing overhead cost | (30000) | |
Fixed selling expense | (28000) | (58000) |
Net disadvantage of closing the plant | (16000) |
Thus, the net disadvantage of closing the plant is $16,000.
The contribution margin per unit current policy
Particular | Amount$ | |
A | Selling price per unit | 32 |
Variable expense per unit | ||
B | Direct material | 10 |
C | Direct labor | 4.50 |
D | Variable manufacturing overhead | 2.30 |
E | Variable selling expenses | 1.20 |
To variable expense per unit | 18 | |
Contribution margin per unit | 14 |
Thus the contribution margin per unit under current policy is $14
The contribution margin lost:
Thus the contribution margin lost during the closure of the plant is $42,000
The fixed manufacturing overhead to be incurred on closing the plant
The fixed selling expense to be incurred on closing the plant
Thus, the fixed selling expense to be incurred on closing the plant is $28,000
Introduction: Cost volume profit analysis (CVP) is used to ascertain the affect on company’s net income and operating income with respect to change in costs and volume of the production of the company. Break-even point is the level of sales which minimum required to overcome fixed and variable cost of the company. It is the condition of no profits no loss for the company.
To compute: avoidable cost per unit
Answer to Problem 6.18P
The unit cost that will be relevant is $20.95
Explanation of Solution
The unit cost will be relevant if the outside supplier supplies the required units as:
Particular | Amount$ | |
A | Direct material | 10 |
B | Direct labor | 4.50 |
C | Variable manufacturing overhead | 2.30 |
D | Fixed manufacturing overhead cost
| 3.75 |
E | Variable selling expenses
| 0.40 |
Total relevant cost per unit | 20.95 |
Thus the unit cost that will be relevant is $20.95
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