Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 27

Basic Decision Analysis Using CVP

Refer to the data for Balance, Inc., in Exercise 3-26. Assume that the company plans to sell 700,000 units per month. Consider requirements (b), (c), and (d) independently of each other.

Required

a. What will be the operating profit?

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b. What is the impact on operating profit if the sales price decreases by 10 percent? Increases by 20 percent?

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c. What is the impact on operating profit if variable costs per unit decrease by 10 percent? Increase by 20 percent?

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d. Suppose that fixed costs for the year are 10 percent lower than projected, and variable costs per unit are 10 percent higher than projected. What impact will these cost changes have on operating profit for the year? Will profit go up? Down? By how much?

Step 1 of 16

Sales revenue

Sales revenue is the revenue earned by the company by selling its goods or providing its services. The sales revenue is calculated as number of units sold multiplied by the sale price per unit.

Variable costs

Variable costs are the costs which varies with the output of quantity produced that is if the number of units produced increases then the variable cost would also increase.

Fixed costs

Fixed costs are cost which does not varies with the number of units produced and would remain fixed to the extent of producing capacity of the company and any goods produced in excess of capacity would lead to increase in fixed costs. If units are produced below the production capacity of the company still the costs incurred would remain fix and would not change.