 Cost-volume-profit analysis

Don't use plagiarized sources. Get Your Custom Essay on
GET AN ESSAY WRITTEN FOR YOU FROM AS LOW AS \$13/PAGE

Name

Institution affiliations

Course

Date

Part I

Question 1

Break- even point units

Break-even point = fixed cost divided by contribution margin per unit.

Current selling price = \$40

Less variable cost = \$24

Contribution margin = (\$40 – \$24) = \$16

Fixed cost = \$270, 000.00

Current BEP (UNITS) = \$270,000/\$16 = 16,875

Mary’s proposal

Selling price = \$38

Variable cost = \$24

Contribution = (\$38 – \$24) = \$14

Fixed cost = \$294, 000

BEP (UNITS) = \$294,000/\$14 = 21,000

BEP Units change will be = (21000 – 16875) = 4125

Question 2

Margin of safety Ratio

Current

Actual sales: units = 20,000

Price per unit = \$40

Total = 20,000* 40 = \$800,000

Break even sales: units = 16,875

Price per unit = \$40

Total = (16, 875 * \$40) = \$675000

Margin of safety = Actual sales less Break even sales = \$800,000 – \$675, 000 = \$125,000.00

Margin of safety ratio = (Actual sales – break even sales)/actual sales *100 = \$125,000/\$800,000*100 = 15.625% = 16%

Margin of safety after Mary’s proposal

Actual sales: units = 24, 0000

Price per unit = \$38

Total = \$38*24000 =\$912,000

Break even sales: units = 21,000

Price per unit = \$38

Total = \$38*21000= \$798,000

Margin of safety = \$912,000 – \$798,000 = \$114,000

Margin safety ratio = \$114,000/\$912,000*100 = 12.50% = 13%

Question 3

Cvp income statement

Current

Sales: Total units = 20,000

Cost per unit = \$40

Total = 20000*\$40 = \$800000

Variable cost: units = 20,000

Cost per unit = \$24

Total variable cost = 20,000*\$24 = \$480,000

Contribution margin = total cost of sales – total variable cost = (\$800,000 – \$480,000) =\$320,000

Net income = contribution margin – fixed cost = (\$320,000- \$270,000) = 50,000

After Mary’s changes

Sales: total units = 24,000

Cost per unit = \$38

Total = 24,000*\$38 = \$912,000

Variable cost: units = 24,000

Cost per unit = \$24

Total = 24,000*24 =\$576, 000

Contribution margin = \$912,000 – \$576,000 = \$336,000

Net income = \$336,000 -\$294,000 = \$42,000

Part II

Memorandum

Date: June 09, 2019

# From:

Accounting Department

# According to the discussion and the calculations above, Mary’s suggestions should not be implemented because they will result in an increase in break-even point as well as a reduction in the margin of safety. The net income will also decrease by \$8000.

References

Calandro, J. J. (2011). The margin of safety principle and corporate strategy. Strategy & Leadership, 39(5), 38-45.

Choo, F., & Tan, K. B. (2011). An Income Statement Teaching Approach for Cost-Volume-Profit (CVP) Analysis by Using a Company’s CVP Model. Journal of Accounting and Finance, 11(4), 23-36.

Tracy, B. (2004, 15 November). Conducting a Break-Even Analysis. Retrieved from Entreprenuer : https://www.entrepreneur.com/article/73782