Flashcards in BEC 2 Planning Techniques Forecasting Deck (14)
Less: Variable costs
Less: Fixed costs
Contribution margin ratio formula
Contribution margin ratio = Contribution margin / Revenue
Less: Cost of goods sold
Less: Operating expense
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
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
Break even points in units
Total fixed costs / Contribution margin per unit
Break-even point formula in dollars
Total fixed costs / Contribution margin ratio
Margin of safety formula
Total sales - Break even sales = Margin of safety in dollars
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
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.
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.
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
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