Strategic: Forecast & Projection

Question 0

When considering alternatives, what cost is best for management to consider?

Answer 0

When considering alternatives, management should consider relevant costs. Relevant costs are those costs that will change under different alternatives.

Question 1

What costs are relevant in a decision analysis situation?

Answer 1

Incremental cost
Avoidable cost
Opportunity cost

Question 2

How do you calculate fixed cost when sales, contribution margin % and margin of safety are given?

Answer 2

1. Subtract margin of safety from sales.
   (This gives you breakeven sales.)
2. Multiply breakeven sales by contribution margin %.
3. At breakeven, fixed cost equals contribution margin.

Example: Sales equal $200,000
Contribution margin is 20%.
Margin of safety is $80,000.
What is fixed cost?

200,000-80,000=120,000
120,000 x 20% = $24,000 which is contribution margin at breakeven and is equal to fixed cost.

Question 3

How are costs in ending inventory calculated using variable (direct) costing?

Answer 3

Under variable (direct) costing, fixed manufacturing overhead is treated as a period cost and expensed.

Question 4

How are costs in ending inventory treated under absorption costing?

Answer 4

Under absorption costing, fixed manufacturing overhead is treated as a product cost and is inventoried.

Question 5

How to maximize profit at full capacity?

Answer 5

To maximize profit at full capacity, contribution margin per hour should be maximized.