Sales (29,000 units) $1,218,000 Total variable cost 812,000 Contribution margin $ 406,000 Total fixed cost 300,000 Opcrating income $ 106,000
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.
Victoria Company produces a single product. Last year’s income statement is as follows:
Required:
1. Compute the break-even point in units and sales dollars calculated using the break-even
units.
2. What was the margin of safety for Victoria last year in sales dollars?
3. Suppose that Victoria is considering an investment in new technology that will increase
fixed cost by $250,000 per year but will lower variable costs to 45% of sales. Units sold
will remain unchanged. Prepare a
makes this investment. What is the new break-even point in sales dollars, assuming that
the investment is made?
Step by step
Solved in 2 steps
