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CVP Analysis


Potato & Chips Limited produces two types of products: Mega1 and Mega2. The company expects to sell 1,200 units of Mega1 and 800 units of Mega2. A projected income statement for the firm as a whole follows: Sales $4,00,000 Less: Variable costs 1,00,000 Contribution margin $3,00,000 Less: Fixed costs 75,000 Operating income $2,25,000 Required: a.        Determine the break-even point in terms of sales revenue. b.        Determine the sales revenue necessary to generate a before-tax profit of $300,000. c.         If Mega1 is currently selling for an average of $ 25 . Variable costs are $15 per Mega1. But the manager thinks that lowering the selling price by $2 would increase the sales significantly. How many extra Mega1 should be sold to justify the reduction in price? d.        Briefly discuss the limitations of cost-volume-profit analysis.