Alfa publishing publishes cookbooks that sell for $50 each. The variable cost per book is $15. At the current level of sales of 20,000 books per issue, the publisher is breaking even. Assume that if copyright is reduced by $3.00 so that variable costs drop to $12 per book and they can be sold for $47, sales should increase from 20,000 to 24,000 books per issue. Under these new conditions, what should the publisher's profit be? a) $120,000.00 b) $130,000.00 c) $160,000.00 d) $140,000.00
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.
Alfa publishing publishes cookbooks that sell for $50 each. The variable cost per book is $15. At the current level of sales of 20,000 books per issue, the publisher is breaking even. Assume that if copyright is reduced by $3.00 so that variable costs drop to $12 per book and they can be sold for $47, sales should increase from 20,000 to 24,000 books per issue. Under these new conditions, what should the publisher's profit be?
a) $120,000.00
b) $130,000.00
c) $160,000.00
d) $140,000.00
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