Consider the info provided below as well as the financial statements and answer the questions that follow. Pearson & Litt is a manufacturing company in the Eastern Cape. Their factory manufactures glass wine bottles for the Blue Valley Beer Co. For 2019 and 2020 respectively : Sales price per unit R15 and R19 Variable cost per unit R6 and R7 Fixed cost (FC) per annum R650 000 and R 855 500 Fixed cost per unit R3 and R4 Current assets R450 600 and R560 700 Current liabilities R510 000 and R780 000 Retained profit R21 809 and R17 600 Net Sales R2 900 320 and R 3 100 100 Cost of sales R390 000 and R475 000 Financial planning forms an integral part of the strategic planning of a firm. Q.1 Differentiate between traditional budgeting and zero‐base budgeting.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Consider the info provided below as well as the financial statements and answer the questions that follow.
Pearson & Litt is a manufacturing company in the Eastern Cape. Their factory manufactures glass wine bottles for the Blue Valley Beer Co.
For 2019 and 2020 respectively :
Sales price per unit R15 and R19
Variable cost per unit R6 and R7
Fixed cost (FC) per annum R650 000 and R 855 500
Fixed cost per unit R3 and R4
Current assets R450 600 and R560 700
Current liabilities R510 000 and R780 000
Retained profit R21 809 and R17 600
Net Sales R2 900 320 and R 3 100 100
Cost of sales R390 000 and R475 000
Financial planning forms an integral part of the strategic planning of a firm.
Q.1 Differentiate between traditional budgeting and zero‐base budgeting.
Q.2 Recommend one of these budgeting methods to Pearson & Litt and
provide reasons for your recommendation.
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