sell 20,000 shirts to break even
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.
Newcastle Ltd manufactures and sells T-shirts imprinted with college names and slogans. Last Year, the shirts sold for £7.50 each, and the variable cost were £2.25 per shirt. The company needed to sell 20,000 shirts to break even. The net operating profit last year was £8,400. The company’s expectations for the coming year include the following:
- The selling price per T-shirt will increase by £1.50
- Variable cost will increase by one third
- Fixed cost will increase by 10%
If Newcastle Ltd wishes to earn £22,500 in net operating profit for the coming year, how much sales does this company must make?
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