Case 1Cost-Volume-Profit (CVP) analysis + marginalanalysis
You are the manager in Bright company that produces paper bagsfor food shops and supermarkets. You are provided with followinginformation:
- Bright company is able to produce 60,000 packs of bags.
- Its current sale volume is 50,000 packs of bags per year. Thishas achieved its maximum sale force.
- Current selling price is $10 per pack of bags.
- Variable costs in total are $200,000;
- Fixed costs are $ 125,000.
A newly established shop has approached you, informing awillingness of purchasing 5,000 packs of bags per year at a priceof $6 for each bag. If this proposal is accepted, unit variablecosts would remain the same however fixed costs would increase by$6,000 per year.
Required:
- Discuss whether this proposal is worthwhile from a financialpoint of view.
- Analyze, if your competitor in the paper industry knows theabove cost and price information, what action(s) may the competitortake to beat you in the market.
