ECQ Inc. is in the process of completing labor negotiations for the coming year. Part of these negotiations call for an increase in the base wage rate for direct labor from P10 to P12 per hour, with a corresponding increase in fringe benefits. At present, fringe benefits amount to 35% of total wages, and this percentage will remain unchanged with the new contract. The present labor standards call for 8 direct labor hours per unit of output. Other conversion costs amount to P40 per unit, of which 75% is for variable costs. Materials costs amount to $8 per unit. Administrative costs are fixed and amount to P10 per unit at the present production level. Products are sold with a gross margin of 30% on sales. Compute the new selling price to be charged if there is no increase in productivity as a result of the new labor contract.
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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ECQ Inc. is in the process of completing labor negotiations for the coming year. Part of these negotiations call for an increase in the base wage rate for direct labor from P10 to P12 per hour, with a corresponding increase in
Compute the new selling price to be charged if there is no increase in productivity as a result of the new labor contract.
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