MAYAR produces and sells 5,600 of XY per year. Cost data are as follows: Variable manufacturing $115 per unit Variable selling and administrative $16 per unit Fixed manufacturing $290,000 per year Fixed selling and administrative $150,000 per year A potential deal has come up for a one-time sale of 32 units at a special price of $120 per unit. The marketing manager states that the sale will not negatively impact the company's regular sales activities and will require the normal variable manufacturing costs and selling and administrative costs. The production manager states that there is plenty of excess capacity and the deal will not impact fixed costs. The controller points out, however, that because the expected increase in revenues are equal to the expected increase in costs to fill the order, the deal will not have any impact on the bottom line. Required: Prepare differential analysis to decide whether the company should accept the special order or not. Discuss you answer.
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.
MAYAR Corporation produces XY product. The selling price for XY product is $250.
MAYAR produces and sells 5,600 of XY per year. Cost data are as follows:
Variable manufacturing $115 per unit
Variable selling and
administrative $16 per unit
Fixed manufacturing $290,000 per year
Fixed selling and administrative $150,000 per year
A potential deal has come up for a one-time sale of 32 units at a special price of $120 per
unit. The marketing manager states that the sale will not negatively impact the company's
regular sales activities and will require the normal variable
selling and administrative costs. The production manager states that there is plenty of
excess capacity and the deal will not impact fixed costs. The controller points out,
however, that because the expected increase in revenues are equal to the expected
increase in costs to fill the order, the deal will not have any impact on the bottom line.
Required: Prepare differential analysis to decide whether the company should accept
the special order or not. Discuss you answer.
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