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Flashcards in BEC 2 Planning Techniques Forecasting Deck (14):
1

Contribution approach

Revenue
Less: Variable costs
Contribution margin
Less: Fixed costs
Net income

2

Contribution margin ratio formula

Contribution margin ratio = Contribution margin / Revenue

3

Absorption formula

Revenue
Less: Cost of goods sold
Gross margin
Less: Operating expense
Net income

4

Contribution and absorption approach difference

Treatment of fixed overhead
Absorption approach - fixed overhead is a product cost
Contribution approach - fixed overhead is a period cost

5

Absorption costing net income and variable costing net income

The difference depends on the change in inventory level during the period
No change in inventory: absorption income = variable income
Increase in inventory: absorption income > variable income
Decrease in inventory: absorption income < Variable income

6

Break even points in units

Total fixed costs / Contribution margin per unit

7

Break-even point formula in dollars

Total fixed costs / Contribution margin ratio

8

Margin of safety formula

Total sales - Break even sales = Margin of safety in dollars

9

Opportunity costs evaluated in considering an opportunity when the firm is operating at capacity

Opportunity cost at full capacity is defined as the net benefit given up from the best alternative use of the capacity

10

Special order decision

Special orders require a firm to decide if a specially priced order should be accepted or rejected.
When there is excess capacity, a special order should be accepted if the selling price per unit is greater than the variable cost per unit.
If the company is operating at full capacity, the opportunity cost of producing the special order should be included in the analysis.

11

A make or buy decisions

the decision to make or buy a component is similar to the special order decision. Managers should consider only relevant costs and select the lowest-cost alternative.

12

A sell or process further decision

A sell or process further decision is made by comparing the incremental cost and the incremental revenue generated after the split off point.
- If the incremental revenue exceeds the incremental cost, the organization should process further
- If the incremental cost exceeds the incremental revenue, the organization should sell at the split off point

13

A keep or drop decision

When deciding if to keep or drop a segment, a firm should compare the fixed costs that can be avoided if the segment is dropped to the contribution margin that will be lost if the segment is dropped.
The segment should be kept if the lost contribution margin exceeds avoided fixed costs and dropped if the lost contribution margin is less than avoided fixed costs

14

Linear regression

Linear regression is a method for studying the relationship between two or more variables. Linear regression is used to predict the value of a dependent variable corresponding to given values of the independent variables.
Simple regression involves only one independent variable
Multiple regression involves more than one independent variable.