|UNIVERSITY OF KARACHI |
|MANAGERIAL ACCOUNTING |
|Applications of CVP concept |
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The per unit variable expense is 100$. The fixed expenses of the company is 15000 and net income for the month of November is 10000 .
APPLICATIONS OF CVP CONCEPTS
1 Change in Fixed Cost and Sales Volume
Shabbir Corporation is currently selling 250 calculators per month (monthly sales of 50000). The sales manager feels that 10000 increase in the monthly advertising budget would increase the sales by 25000 to a total of 375 units. The following table shows the effect of proposed change in the monthly advertising budget.
Current sales Sales with Difference
Sales 50000 75000 25000
Variable expense (25000) (37500) 12500
Contribution margin 25000 37500 12500
Fixed expenses (15000) (25000) 10000
Net income 10000 12500 2500
The advertising budget should be approved since it would lead to an increase in net operating income of 2500.
2 CHANGE IN VARIABLE COST AND SALES VOLUME
According to the original data Shabbir corporation currently selling 250 calculators per month. The management is now considering the use of higher quality components which would increase variable cost and there by reduce the contribution margin by 12$ per calculator. However the manager predicts that it increases sales to 300 per month.
The 12$ increase in the variable cost will decrease the unit contribution margin by 12$ from 100$ to 88$.
Expected total contribution margin with higher quality components
350 tape recorders x 88$ per tape recorder = 30800
Present total contribution margin
250 calculator x 100$ per calculator = 25000
Increase in total contribution margin 5800
According to the analysis the higher quality component should be used. Since fixed cost will not change, 5800 increase in the contribution margin shown above resulted in increase in net income.
3 CHANGE IN FIXED COST, SALES PRICE AND SALES VOLUME
According to original data the company is currently selling 250 calculators per month. To increase the sales, sales manager would like to cut the selling price by 30$ and increase the advertising budget by 10000. The sales manager thinks that the unit sales would increase by 60% (400). Would the changes be made?
Present 250 Expected 400