Ms. Wang is a successful businesswoman who sells various cosmetic products. She

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:
2 pts 1. 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.
1 pt    2. Briefly describe the C-V-P model.
2 pts   3. Describe/give an example of how the C-V-P model could be used by Ms. Wang

Explanation / Answer

1. cost information needed
            Fixed cost related to new product
           Variable cost per unit related to new product
           Sales Prices per unit of the new product
           minimum no. of units which could be sold

2. C-V-P model (Cost-Volume-Profit Analysis)
            with the help of C-V-P model, we found out the break even quantity with the help of following formula :    Break even point (in units) = Fixed cost / contribution per unit
                           Where,
   Contribution per unit = sales price per unit- variable cost per unit
Break even point is the no profit no loss point for the firm, it means the firm can recover all its cost with sale of break even point units but their will be no profit on break even sale.
if we sales units higher then break even point, it will be profitable and if we sale units lower than break even poin, it will be loss making or under recovery of cost.

3. with the help of C-V-P model, Ms. wang can calculate its break even point for new product and if Ms. wang has capability to sale units higher than its break even sale units than it should add the product otherwise not.
For example, if sales price of new prodcut = 100
                          Variable cost per unit = 60
                          Total fixed cost = 40000
Contribution per unit = 100-60 =40
Then B.E.P. sales (units) = Fixed cost / contribution per unit
                                       = 40000/40
                                       = 1000 units
If Ms. wang can sales 1000 units or more than it should add the product and otherwise not.
  
                                

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