Profitability & Pricing Analysis

Question 1

Absorption Approach

Answer 1

Revenue 
-COGS
= Gross margin
-operating expenses
= net income

Question 2

Contribution Approach (variable/direct costing)

Answer 2

Revenue
- Variable costs
= Contribution Margin
- Fixed costs
= Net income

Question 3

contribution margin

Answer 3

sales - variable costs

Question 4

contribution margin ratio

Answer 4

contribution margin/revenue

Question 5

breakeven point in dollars

Answer 5

total FC/ CM Ratio

Question 6

breakeven point in units

Answer 6

total FC/ CM per unit

Question 7

Breakeven point in dollars

Answer 7

unit price x breakeven point (in units)

Question 8

sales units needed to obtain a desired profit

Answer 8

(FC + Pretax profit) / CM per unit

Question 9

sales $ needed to obtain a desired profit

Answer 9

VC + FC + Pretax profit

Question 10

Sales $ for desired profit / vc

Answer 10

FC + Pretax profit / CM Ratio

Question 11

Margin of Safety $

Answer 11

total sales - breakeven sales

Question 12

margin of safety %

Answer 12

margin of safety $ / total sales

Question 13

target cost

Answer 13

market price - required profit

Question 14

transfer pricing (non-global)

Answer 14

price charged for the sale or purchase of a product internally

Question 15

transfer pricing (global)

Answer 15

concern from a tax-authority perspective is that a company will assign the high tax jurisdiction & the highest profit in the lowest tax jurisdiction

Question 16

arms length principle

Answer 16

transfer prices must approximate the prices for comparable transactions between unrelated parties