Quality Chairs Inc. (QC) manufactures chairs for industrial use. Laura Winters, the Vice President for Marketing at QC, concluded from market analysis that sales were dwindling for QC's standard three-foot chair due to aggressive pricing by competitors. QC's chairs sold for $550 whereas the competition's comparable chair was selling for $495. Winters determined that a price drop to $495 would be necessary to regain market share and reach a targeted annual sales level of 10,000 chairs. Cost data based on sales of 10,000 chairs: Budgeted Quantity Actual Quantity Actual Cost Direct materials (board feet) 88,000 79,500 $ 1,250,000 Direct labor (hours) 71,350 73,775 875,000 Machine hours (hours) 11,400 11,250 250,000 Finishing and packing (hours) 6,500 6,400 125,000 In order to reduce costs so as to reach the desired target cost, Quality Chairs should also focus on reducing the cost of: Multiple Choice Mechanical assembly Direct labor Machine setups Direct materials
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.
Quality Chairs Inc. (QC) manufactures chairs for industrial use. Laura Winters, the Vice President for Marketing at QC, concluded from market analysis that sales were dwindling for QC's standard three-foot chair due to aggressive pricing by competitors. QC's chairs sold for $550 whereas the competition's comparable chair was selling for $495. Winters determined that a price drop to $495 would be necessary to regain market share and reach a targeted annual sales level of 10,000 chairs.
Cost data based on sales of 10,000 chairs:
| Budgeted Quantity | Actual Quantity | Actual Cost | |||||||
| Direct materials (board feet) | 88,000 | 79,500 | $ | 1,250,000 | |||||
| Direct labor (hours) | 71,350 | 73,775 | 875,000 | ||||||
| Machine hours (hours) | 11,400 | 11,250 | 250,000 | ||||||
| Finishing and packing (hours) | 6,500 | 6,400 | 125,000 | ||||||
In order to reduce costs so as to reach the desired target cost, Quality Chairs should also focus on reducing the cost of:
-
Mechanical assembly
-
Direct labor
-
Machine setups
-
Direct materials
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