B4-M2

Question 1

Breakeven point

Answer 1

in units =total fixed costs/ Contribution margin per unit
in dollars= Total fixed costs/ Contribution margin ratio
-assumes all variable costs and revenues are constant per unit and linear over the relevant range
-fixed costs are constant and linear

Question 2

Margin of saftey

Answer 2

in dollars = Total sales - Break-even sales

in % = margin of safety in dollars/ total sales

Question 3

Contribution margin ratio

Answer 3

=Contribution margin/ Sales

-used to evaluate product with highest profitability

Question 4

Contribution margin

Answer 4

=Revenue- Variable (direct) costs
(Net Income= CM- Fixed costs)
@ breakeven point fixed costs=contribution margin
-maximize to maximize profit

Question 5

Units sold to achieve profit=

Answer 5

=(Fixed costs+ Profit) / Contribution Margin per unit

Question 6

Variable (direct) costing

Answer 6

• lowest inventory value (only variable costs accounted for in inventory)
• only variable overhead, direct material and labor are inventoriable costs
• fixed overhead and selling and admin exp are period

Question 7

Absorption costing

Answer 7

• used for GAAP external reporting
• both variable and fixed costs are inventoriable costs
• selling, general and administrative exp are period costs
• encourages higher inventory value so higher current ratio
• higher equity so lower ROE
• higher income when production> sales (by amount of fixed costs related to units remaining)

Question 8

Target costing (for target pricing)

Answer 8

Market price- Required profit

-least associated with cost based pricing