Module 6 Flashcards
(19 cards)
Management decisions often result in:
> changes in business activity
> how the costs of behave in these situations will have a significant impact on the financial results of the business
What can we recall about variable costs? (how do they change and do they remain constant?
> total variable costs change as production levels change (Directly affected by production levels).
> they move in the same direction and in proportion to production levels. (i.e. additional labour results in increased production labour costs).
> remain constant on a per unit basis (production remains constant when expressed on a per unit basis).
What can we recall about fixed costs?
> remain fixed (constant) within a certain production range
remain constant in total, but reduce with each additional unit produced (spreads out)
What is the formula for total cost?
Total Cost = (Variable Unit Cost x # of products) + total fixed cost
In it’s simplest terms, what is a contribution margin?
> is what’s left when you deduct your variable expenses from your revenue - aka it’s the theoretical amount left to cover fixed costs.
What does contribution margin equal?
> equals revenue less variable expenses.
What is the purpose of the contribution margin?
> is to first cover the company’s fixed cost, then whatever is left results in the company’s profit.
> If the contribution margin is insufficient to cover the fixed costs, a loss will occur.
If we know what each item we sell adds in contribution margin, we can forecast what?
> a change in sales will mean to our net profit.
What is a contribution income statement used for?
> predicting profits and testing out different scenarios.
> allows managers to group costs that behave differently.
By sorting our costs into fixed and variable categories, we are able to:
> predict how changes in volume would affect our bottom line.
What is a breakeven point?
> no profit and no loss (breakeven)
Any sales above a breakeven point will result in what?
> Result in profit
incremental sales quantity that goes to profit.
What is the formula for contribution margin?
Revenue less variable expenses
How do we express contribution margin as a percent in sales?
> as a ratio (CM ratio)
What is breakeven formula in dollars?
fixed cost / contribution margin ratio
What is the breakeven formula in units?
Fixed cost / contribution per unit
What do we calculate profit levels in dollar sales?
(FIXED COST + PROFIT) / CONTRIBUTION MARGIN RATIO
How do we calculate profit levels in units?
(Fixed cost + profit / contribution margin)
