Quiz 16: Cost-Volume-Profit Analysis

Business

In this solution we are required to calculate the variable cost, contribution margin and contribution margin ratio, hence it shall be done in following manner: 1. Here in 1 st Part we need to calculate: a. Variable product cost per unit: The variable cost per unit is a cost which keeps on changes with changes in the production levels. Hence the variable cost per unit shall be calculated in following manner: img b. The total variable cost per unit shall be calculated in following manner: img c. The Contribution margin shall be calculated as a difference between Sales Price and Variable cost per unit: img d. Contribution margin ratio is calculated using formula: img e. The total fixed expense shall be calculated by adding up the fixed expenses of the factory and selling hence it shall be calculated in following manner: img 2. The Contribution margin income statement is prepared by deducting the variable expenses and thereafter deducting fixed expenses: img 3. Here in 1 st Part we need to calculate the: a. Variable product cost per unit: The variable cost per unit is a cost which keeps on changes with changes in the production levels. Hence the variable cost per unit shall be calculated in following manner: It shall remain unchanged in comparison to Part-I as variable charges are unchanged. img b. The total variable cost per unit shall be calculated in following manner: img c. The Contribution margin shall be calculated as a difference between Sales Price and Variable cost: img d. Contribution margin ratio is calculated using formula: img e. The total fixed expense shall be calculated by adding up the fixed expenses of the factory and selling hence it shall be calculated in following manner: img

Cost-volume-profit (CVP) analysis estimates how changes in variable costs, fixed costs, sales volume and price affect a company's profit. It is a powerful tool for planning and decision making. CVP analysis helps managers to solve following issues in the companies: 1) Through CVP managers can reach the number of units that must be sold to breakeven; it helps in deciding the volume of the production. 2) CVP estimates the impact of any reduction and any increase in fixed costs on the break-even-point. 3) CVP addresses the impact of an increase in price on profit; it helps in price determining. 4) CVP analysis shows how revenues, expenses and profits behave as volume changes; it helps managers to control these all aspects in a manner to maximize the profit. 5) CVP analysis allows managers to do sensitivity analysis and risk analysis by examining the impact of various price or cost levels on profit.

1. The Sales Commission per unit shall be calculated in the following manner: img The contribution margin is a difference between sales and variable cost, it shall be calculated in the following manner: img While calculating variable costs the Direct Material, Direct Labor and Variable overhead is added up. 2. The breakeven point is a point where there is no profit or loss, it is calculated using formula: img Note: While calculation of variable cost the Selling commission is also considered and while calculation of Fixed Expenses the Administrative and selling expenses are also considered. The income statement shall be calculated I following manner: img Note: The income statement is for 3,350 units which is breakeven point. 3. The target profit can be calculated by using formula: img 4. For the target income of 322,000, it shall be calculated in following manner: img Conclusion : So lesser number of units shall be sold.