With reference to Table 5 and using the high-low method, estimate the variable cost per t-shirtproduced and sold. Show your calculations. Using the high-low method, estimate the monthly fixed cost. Show your calculations. Using the information in (1) and (2) above, how many t-shirts should Andreea Ltd. produce and sellin January 2021 to break even? Show your calculations.
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.
Breakeven Analysis
Andreea Ltd. manufactures t-shirts, which sell at £15 each. Table 5 shows the sales and total costs for the period July 2020 to December 2020. Monthly fixed costs have been the same each month and it is expected they will remain constant for the remainder of the financial year (up to and including March 2021).
Table 5 – Sales Volume and Total Costs
Month Sales (Units) Total Costs
|
July |
14,502 |
195,020 |
|
August |
15,000 |
200,400 |
|
September |
13,320 |
183,200 |
|
October |
19,100 |
241,000 |
|
November |
24,806 |
308,060 |
|
December |
36,000 |
400,000 |
Required for this part (The report should not exceed 400 words in total.)
-
With reference to Table 5 and using the high-low method, estimate the variable cost per t-shirtproduced
and sold. Show your calculations.
-
Using the high-low method, estimate the monthly fixed cost. Show your calculations.
-
Using the information in (1) and (2) above, how many t-shirts should Andreea Ltd. produce and sellin January 2021 to break even? Show your calculations.
-
How many t-shirts does the company need to produce and sell to achieve a profit target of £200,000 in January 2021? Show your calculations.
-
What is the margin of safety for January 2021, assuming the profit target for that month has beenachieved? Show your calculations.
-
Write a 400-word report, addressed to the sales manager of Andreea Ltd. The report should:
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Explain, with reference to the scenario and the table provided, why the high-low methodhad to be used in this case;
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State and interpret the fixed and variable costs;
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Advise on the number of t-shirts Andreea Ltd. need to produce and sell in January 2021 to
breakeven;
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Advise on the number of t-shirts Andreea Ltd. need to produce and sell to achieve the targetprofit
for January 2021;
-
Interpret the margin of safety for January 2021;
-
Briefly discuss the limitations of breakeven analysis in this situation.
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