BEC 2 Profitability and Pricing Analysis

Question 1

What is the formula for the contribution approach?

Think Net Income

Answer 1

Revenue
Less: Variable Costs
= Contribution Margin
Less: Fixed Costs
= Net Income

Question 2

What is the contribution margin ratio formula?

Answer 2

Contribution margin ratio =

Contribution margin / Revenue

Question 3

What is the absorption formula?

Think Gross Margin

Answer 3

Revenue
Less: COGS
= Gross Margin
Less: Operating Expense
= Net Income

Question 4

Explain the difference between the contribution approach and the absorption approach?

Answer 4

The difference is the treatment of fixed O/H.

Under the absorption approach, fixed O/H is a product cost.

Under the contribution approach, fixed O/H is a period cost.

Question 5

Explain the difference between absorption costing net income and variable costing net income?

Answer 5

The difference depends on the change in inventory level during the priod.

No Change in inventory: Absorption income = Variable Income

Increase in inventory: Absorption income > Variable Income

Decrease in inventory: Absorption income

Question 6

What is the formula for breakeven point in units?

Answer 6

Total fixed cost

/

Contribution margin per unit

Question 7

What is the formula for breakeven point in dollars?

Answer 7

Total fixed costs

/

Contribution margin ratio

Question 8

What is the formula for required sales volume for target profit?

Answer 8

Sales (units) =

(Fixed cost + Pretax profit)

/

Contribution margin per unit

Question 9

What is the formula for setting selling price based on assumed volume?

Answer 9

Sales price per unit =

(FC + VC + Preptax profit)

/

Number of units sold

Question 10

What is the margin of safety formula?

Answer 10

Total sales (in $) - Breakeven sales (in $) = Margin of safety (in $)

Question 11

Describe transfer pricing (from a non-global perspective) and list the strategies that may be used to establish transfer prices.

Answer 11

A transfer price is the price charged for the sale / purchase of a product internally (between two or more divisions within the same company)

The following strategies may be used to establish transfer pricing:

1. Negotiated Price
2. Market Price
3. Cost

Question 12

Describe transfer pricing (from global perspective)

Answer 12

Transfer pricing is a methodology for allocating profit and losses among related entities within the same legal group or corporation in different tax jurisdictions.

Transfer prices must approximate the prices for comparable transactions between independent parties.