Kevin Co.’s projected contribution-format income statement for the upcoming month is shown below: Sales (500 units) $10,000 Variable expenses 4,000 Contribution margin 6,000 Fixed expenses 1,000 Net operating income $5,000 required 1.>The company’s manager thinks that adding a salaried sales staff member at a cost of $2,000 per month will increase sales by $4,000 per month. If he is correct, what will be the net dollar advantage or disadvantage of making this change? 2.>Refer to the original data, the company’s manager believes that a new production process will improve profitability. He plans to add new machinery that will cut variable expenses in half. This will increase fixed expenses by $3,000. He expects after this change the company’s unit sales will increase by 25%. If he is correct, what will be the net dollar advantage or disadvantage of making this change? 3.>Refer to the original data, the company expects to decrease variable expenses by 5% and wishes to pass the savings along to customers. The manager wishes to maintain the exact same contribution margin ratio as the original data. What sales price will need to be charged to maintain the same contribution margin ratio?
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.
Kevin Co.’s
|
Sales (500 units) |
$10,000 |
|
Variable expenses |
4,000 |
|
Contribution margin |
6,000 |
|
Fixed expenses |
1,000 |
|
Net operating income |
$5,000 |
required
1.>The company’s manager thinks that adding a salaried sales staff member at a cost of $2,000 per month will increase sales by $4,000 per month. If he is correct, what will be the net dollar advantage or disadvantage of making this change?
2.>Refer to the original data, the company’s manager believes that a new production process will improve profitability. He plans to add new machinery that will cut variable expenses in half. This will increase fixed expenses by $3,000. He expects after this change the company’s unit sales will increase by 25%. If he is correct, what will be the net dollar advantage or disadvantage of making this change?
3.>Refer to the original data, the company expects to decrease variable expenses by 5% and wishes to pass the savings along to customers. The manager wishes to maintain the exact same contribution margin ratio as the original data. What sales price will need to be charged to maintain the same contribution margin ratio?
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