Assignment: Management Accounting
Cost-Volume- Profit Analysis
The Redco Company manufactures two products. Information about the two product lines is as follows:
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Product A
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Product B
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Selling price per unit
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$90
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$40
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Variable costs per unit
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45
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15
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Contribution margin per unit
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$45
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$25
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The company expects fixed costs to be $200,000. The firm expects 60% of its sales (in units) to be Product A (a sales mix of 3:2).
Required:
1. Calculate the contribution margin per package.
2. Determine the break-even point in units for Product A and Product B.
3. If Redco had to discontinue one of the two products - would it be Product A or Product B and why?
It will be Product A
Generally, the lower the break-even point, the higher the profit and less the operating risk.
4. What other factors should be considered when making a decision to continue ordiscontinue a product line or segment.
• Will discontinuing a segment have adverse effects on the sale of other products?
• Does the segment have a positive contribution margin?
• Can any of the fixed costs be avoided if the segment was discontinued?
• Can the freed up capacity be used for another purpose?
5. The manager of Redco wants to know how much sales would be necessary to generate a before-tax profit
6. Briefly discuss the limitations of cost-volume-profit analysis.
Limitations
• Cost volume profit (CVP) is a short run marginal analysis it assumes that unit variablecosts and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable. For longer-term analysis that considers the entire life-cycle of a product, one therefore often prefers activity - based costing or throughput accounting.