BMT 13 - Contribution (HL - Unit 4)

Question 1

What is Contribution per Unit (CPU)?

Answer 1

The difference between Price and the Unit Variable Cost

E.g. If P = $10 and VC = $8 per unit, then CPU = 10 - 8 = 2

Question 2

Total Contribution

Answer 2

• Represents the total return (or profit) from selling products.
• Total Contribution = Total Revenue - Total Variable Costs
• Total Contribution = CPU x Quantity

Question 3

What is the formula for Profit?

Answer 3

Profit = Total Contribution - Fixed Costs

Total Contribution can also be calculated as Total Revenue - Variable Costs.

Question 4

Contribution Costing

Answer 4

• An accounting method that assigns only variable costs to products or units.
• This method helps identify the most and least profitable products.

Question 5

Use of Contribution Costing

Answer 5

Identify:

• products that are the most profitable
• those that are less profitable per unit

Question 6

What is Absorption Costing?

Answer 6

An accounting method where all costs (Fixed and Variable) are allocated to a product/department

Question 7

What is a Make or Buy Decision?

Answer 7

A decision on whether to make a product in-house or buy it from another business

Example: A car manufacturer deciding between making tires or purchasing them.

Question 8

In the context of Make or Buy Decisions, what is the implication if the cost to buy is greater than the cost to make?

Answer 8

Cost to buy > Cost to make = Business should make it

Example: Buying a tire for $120 versus making it for $100.

Question 9

Where else could costs be allocated?

Answer 9

• Factory space used
• Units of production or revenue
• Number of employees