Ms. Wang is a successful businesswoman who sells various cosmetic products. She
ID: 2455891 • Letter: M
Question
Ms. Wang is a successful businesswoman who sells various cosmetic products. She continually searches for new products to add to her growing business to further increase the profitability of her company. She is discussing with her senior staff about what products to add and not add to her product lines. Required: What types of cost information should Wang estimate/calculate to help her decide whether to add or not add new products to her existing product lines. Briefly describe the C-V-P model. Describe/give an example of how the C-V-P model could be used by Ms. WangExplanation / Answer
(a) Marginal costing will help Ms. Wang in deciding whether to add or not add new products to her existing product lines.
(b)
Cost-Volume-Profit (CVP) analysis is a managerial technique that shows the effect of sales volume and product costs on operating profit of an organisation.
This model shows how operating profit is affected by changes in variable costs, fixed costs, selling price per unit and also shows that how sales mix of two or more different products affects operating profits.
(c)
CVP model can be used by Ms. Wang because under this model total cost is divided between variable cost and fixed cost.
In given case of Ms. Wang this technique is strongly suggested because Ms. Wang will take decision regarding adding new products or not. If new products are able to realize all variable costs and provides some margin of safety then there will be net increase in the profits.
Thus it is clear that CVP model is useful to Ms. Wang.
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