Concept Introduction:
Cost Volume Profit (CVP) Analysis:
The Cost Volume Profit analysis is the analysis of the relation between cost, volume, and profit of a product. It analyzes the cost and profits at the different level of production, in order to determine the breakeven point and required the level of sales to earn the desired profit.
Contribution margin means the margin that is left with the company after recovering variable cost out of revenue earned by selling smart phones. The formula for contribution margin is as follows:
Contribution margin = Sales - Variable cost.
Similarly contribution margin ratio = Contribution/sales
Breakeven Point:
The Breakeven point is the level of sales at which the net profit is nil. It can be explained as a situation where the business is generating a sale that is equal to the expenses incurred and hence no
Weighted Average Contribution Margin:
Weighted Average Contribution Margin is calculated for two products with the help of following formula:
To Indicate:
The reason for difference in overall Breakeven points
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Survey of Accounting (Accounting I)
- Diving Wear Ltd makes neoprene wetsuits. The company’s projected income statement for the coming year is as follows: Sales (65,000 units) $15,600,000 Less: Variable costs 8,736,000 Contribution margin 6,864,000 Less: Fixed costs (incl. advertising) 4,011,744 Operating income $2,852,256 Required:(iv) Suppose actual sales revenue exceed the estimated amount on the projected incomestatement by $612,000. Without preparing a new income statement, determine theamount by which the profits are underestimated.(v) The company’s management has decided to increase the advertising budget by$140,000 and reduce the average selling price to $200. These actions will increase salesrevenues by $1 million. Will this improve the company’s financial situation? Prepare anew income statement to support your answer.arrow_forwardA company is making plans for next year, using cost-volume-profit analysis as its planning tool. Next year's sales data about its product are as follows Selling price P60 Variable manufacturing costs per unit 22.50 Variable selling and administrative costs 4.5 Fixed operating costs (60% is manufacturing costs) P159,500 Income tax rate 30% How much should sales be next year if the company wants to earn profit after tax of P23,100, the same amount that it earned last year?arrow_forwardThe following income statement applies to Finch Company for the current year: Income Statement Sales revenue (480 units × $30) $ 14,400 Variable cost (480 units × $15) (7,200 ) Contribution margin 7,200 Fixed cost (4,000 ) Net income $ 3,200 Required a. Use the contribution margin approach to calculate the magnitude of operating leverage. b. Use the operating leverage measure computed in Requirement a to determine the amount of net income that Fincharrow_forward
- Required information [The following information applies to the questions displayed below.] Data for Hermann Corporation are shown below: Selling price Variable expenses Contribution margin Fixed expenses are $74,000 per month and the company is selling 4,400 units per month. Req 2A Per Unit $ 70 49 $ 21 2-a. Refer to the original data. How much will net operating income increase (decrease) per month if the co pany uses higher-quality components that increase the variable expense by $4 per unit and increase unit sales by 25%. 2-b. Should the higher-quality components be used? Req 2B Percent of Sales Complete this question by entering your answers in the tabs below. 100% 70 30% increases by Refer to the original data. How much will net operating income increase (decrease) per month if the company uses higher- quality components that increase the variable expense by $4 per unit and increase unit sales by 25%. Net operating incomearrow_forwardA projected income statement of Hailwork’s company for the coming year follows: Sales $506300 |Total Variable Cost 170865 Contribution Margin ? Total Fixed Cost 175000 Operating Income ? Compute contribution margin and contribution margin ratio Compute the Operating Income How much revenue must be earned in order to breakeven What is the effect on contribution margin ratio if the unit selling price and unit variable cost increase by 10 percent each?arrow_forwardThe USB Company's profit statement for the preceding year is presented below. Except as noted, the cost and sales relationship for the coming year is expected to follow the same pattern as in the preceding year. Sales and production are always equal. Sales (2,000,000 boxes at £5) Variable costs Fixed costs Profit What is the break-even point in units A) 1,250,000 units B) 750,000 units C) 2,500,000 units D) 5,000,000 units A) 1,500,000 units B) 1,750,000 units C) 1,000,000 units D) 1,250,000 units A) 5.8m B) 3.2m C) 2m D) 12.8m £m 10 2 8 S call An extension to the factory will add £2m to the fixed costs. How many boxes of USBs would have to be sold after the extension to break even? 3 If the factory produces 3,200,000 boxes of USBs after the extension and fixed costs become £7m in total, what profit will be earned?arrow_forward
- Consider the following information for a given business. Sale revenue =GHS40,000 VC per unit =GHS20 Activity level =1,000 to break even Required: 1. Determine the TFC 2. Express the contribution as a percentage of sale. 3. The company plans to sale 1,500 unit in the next period. What will be the percentage margin of safety (MoS) 4. What margin should the business employ for planning purposes? 5. What total profit should the business expect in order to achieve it's planned sales?arrow_forwardCompute the Revenue Effect- Growth Component, indicate if favorable/(unfavorable). *The activity driver for conversion cost is the direct labor hours. PROBLEM: Financial Perspective Gloria Corporation presents the following information for year 2020 & 2021 2020 2021 Sales P 45, 000 P 38, 000 Production Expenses Direct materials 9, 504 8, 976 12,000 Direct labor 10,000 Factory overhead Gross Profit 5, 000 P 14, 520 5, 000 P 18, 000 Operating Expenses 13,000 13, 000 Operating income P5, 000 P1, 520 During the year 2020, the corporation was able to sell 10, 000 units which is 25% above the sales in 2021. The same capacity was used for factory overhead and operating expenses for years 2020 and 2021. Other data are as follows: 2020 2021 Raw materials used ( kg) 1, 200 720 Direct labor hours 1, 000 816arrow_forwardRequired information [The following information applies to the questions displayed below.] Monterey Co. makes and sells a single product. The current selling price is $15 per unit. Variable expenses are $9 per unit, and fixed expenses total $27,000 per month. (Unless otherwise stated, consider each requirement separately.) e. What questions would have to be answered about the cost-volume-profit analysis simplifying assumptions before adopting the price cut strategy of part d? (Select all that apply.) Check All That Apply Does the increase in volume move fixed expenses into a new relevant range? Does the increase in volume move variable expenses into new relevant range? Are variable expenses really linear? Are fixed expenses really linear?arrow_forward
- The USB Company's profit statement for the preceding year is presented below. Except as noted, the cost and sales relationship for the coming year is expected to follow the same pattern as in the preceding year. Sales and production are always equal. Sales (2,000,000 boxes at £5) Variable costs A) 5.8m B) 3.2m C) 2m D) 12.8m Fixed costs Profit £m 10 2 8 S 3 An extension to the factory will add £2m to the fixed costs. If the factory produces 3,200,000 boxes of USB$ after the extension and fixed costs have become £7m in total, what profit will be earnedarrow_forwardABM Enterprise reported business transactions for a certain month in 2020: Unit Price, P55.75; Variable Cost Per Unit, P25.50, and Total Fixed Cost, P45,375.00. a. Compute for the number of units to be sold in order to break-even. b. How is the amount of sales to break-even?arrow_forwardAssume a retailing company has two departments-Department A and Department B. The company's most recent contribution format income statement follows: Sales Variable expenses Contribution margin Fixed expenses Net operating income (loss) Multiple Choice O The company says that $110,000 of the fixed expenses being charged to Department B are sunk costs or allocated costs that will continue if the segment is discontinued. However, if Department B is discontinued the sales in Department A will drop by 12%. What is the financial advantage (disadvantage) of discontinuing Department B? O O O $(148,000) $(152,000) $(147,600) Total $ 800,000 320,000 $(127,600) 480,000 400,000 $ 80,000 Department A Department B $ 350,000 $ 450,000 120,000 200,000 230,000 250,000 260,000 140,000 $ 90,000 $ (10,000)arrow_forward
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