Rose Trading had RM210,000 of net profit in year 2021 when the selling price per unit was RM150, the variable costs per unit were RM90, and the fixed costs were RM570,000. Management expects per unit data and total fixed costs to remain the same in year 2022. The manager of Rose Trading is under pressure from investors to increase net profit by RM52,000 in year 2022. Required: (i) Compute the number of units sold in year 2021. (ii) Compute the number of units that would have to be sold in year 2022 to reach the shareholders’ desired profit level.
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.
Rose Trading had RM210,000 of net profit in year 2021 when the selling price per unit was
RM150, the variable costs per unit were RM90, and the fixed costs were RM570,000.
Management expects per unit data and total fixed costs to remain the same in year 2022. The
manager of Rose Trading is under pressure from investors to increase net profit by RM52,000 in
year 2022.
Required:
(i) Compute the number of units sold in year 2021.
(ii) Compute the number of units that would have to be sold in year 2022 to reach the
shareholders’ desired profit level.
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