Profitability & Pricing Analysis

Question 1

Contribution Margin MEMORIZE THIS

Answer 1

Contribution Margin = Sales - Variable Costs

Question 2

Contribution Margin Ratio MEMORIZE THIS

Answer 2

Contribution Margin Ratio = Cont Margin / Revenue

Question 3

Cost-Volume-Profit Analysis (CVP Analysis)

Answer 3

Used by managers to “Forecast profits at different levels of sales and production volume.

Question 4

Different Approaches to Cost-Volume-Profit Analysis

Have ONE DIFFERENCE ONLY

Answer 4

Absorption Approach
vs
Contribution Approach (aka-variable costing or direct costing)

(Difference is the way they treat Fixed Factory Overhead)

Question 5

Absorption Approach to CVP Analysis

Fixed Vactory OH absorbed in Inventory Values

Answer 5

Absorption Approach - All fixed factory overhead is treated as a PRODUCT COST and is INCLUDED IN INVENTORY VALUES. COGS includes both fixed and variable costs.

Question 6

Equation for the Absorption Approach
U.S. GAAP Product Cost—>

                                        Period Cost----->

Answer 6

Revenue
Less: COGS = DM+DL+O/H(fixed & variable)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Gross Margin
Less: Operating expenses =SG&A(fixed & var)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income

Question 7

Contribution Approach("Direct Costing" or "Variable Costing") to CVP Analysis
(FFOH expensed in the Period)

Answer 7

Contribution Approach - All fixed factory overhead is treated as PERIOD COST and is EXPENSED in the period incurred.

useful for INTERNAL REPORTING ONLY
MUST USE GAAP FOR EXTERNAL

Question 8

Equation for the Contribution Approach

also referred to as “Variable Costing” or “Direct Costing”

Answer 8

Revenue
Less: Variable Costs=DM+DL+Var O/H+Var SG&A
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Contribution Margin
Less: Fixed Costs=Fixed O/H + Fixed SG&A
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Net Income

Question 9

Linear vs Non-Linear

Answer 9

Linear = Constant rate of change (straight line on graph)

Non-linear=not directly proportional (wavy line on graph)

Question 10

Breakeven Sales MEMORIZE THIS

Answer 10

= Fixed Costs / Contribution Margin %

Question 11

Margin of Safety =

Answer 11

Excess of Sales over Break Even Sales

Question 12

Breakeven Formula

Answer 12

Sales - Var Costs - Fixed Costs = Profit of 0

Question 13

Breakeven Point in Units MEMORIZE THIS

Answer 13

BE/unit = Fixed Costs / Contribution Margin/Unit

Question 14

Current Ratio

Answer 14

Current Assets / Current Liabilities

Question 15

Traceable Costs

Answer 15

same thing as variable costs

Question 16

In order to maximize profit if you are at Full Capacity ……

Answer 16

Maximize your contribution per hour

Question 17

Formula to Compute Units sold

Answer 17

Units Sold = CM/unit x Units

Question 18

Absorption Costing Does the Following:

Answer 18

Absorbs FFOH into the units produced - Hence Inventory Absorbs some of those costs & profits are UP.

It encourages Larger Inventory in general