Chapter 3

Question 1

How to calculate Operating Income?

Answer 1

Operating Income (OI) = Revenue - Variable Costs( VC) - Fixed Costs (FC)

Question 2

Contribution Margin?

Answer 2

Contribution Margin = Revenue - Total Variable Costs
Unit Contribution Margin = Price - VC per Unit

Question 3

CM-Ratio

Answer 3

CM/Sales or CMu/Price

Question 4

What is Break Even Point

Answer 4

Point where revenues equal costs; where profit  0

Question 5

BE Currency and Units Formula?

Answer 5

Units = Fixed Costs / CM or Currency = Fixed Cost / CM-Ratio

Question 6

How do we modify Break Even with Target Product

Answer 6

By simply adding target profit to fixed costs, the break-even point formula can be modified to become a profit planning tool:

Target Profit Units = Fixed Costs + Target Profit) / Unit contribution margin
Target Profit Sales = Fixed Costs + Target Profit) / CM ratio

Question 7

What is the difference of Absorption and Variable Costing

Answer 7

Absorption (full) costing: Both fixed and variable production costs are assigned to products

Variable Costing: Only variable costs are assigned to products (also called direct costing)

Question 8

Absorption Costing (AC)

Answer 8

AC is necessary for financial reporting to meet legal and regulatory requirements

=Sales
- OGS
= Gross Margin
-OPEX (Fixed and Variable S&A,…)
-Tax
= Operating Income

Question 9

Variable Costing (VC)

Answer 9

VC focuses more on internal decision-making, particularly for short-term operations

= Sales
- Variable Costs (Variable COGS, Variable S&A)
= Contribution Margin
- Fixed Cost (fixed OH, fixed S&A)
= Operating Income

Question 10

Shortcut method?

Answer 10

(Change in Inventory in Units) x (predetermined fixed overhead rate per unit)

Question 11

What Methods yields higher Operating Income

Answer 11

If Production > Sales => Absoprtion and vice-versa