Cost-Profit Analysis: Questions And Answers

QUESTION 4: Kai decides to add color and keep his price the same. This will increase variable costs by $0.40 per issue. What will be the new unit volume (copies per issue) required to maintain $500 profits and cover the increased fixed and variable costs?

13. If the selling price is $22 per unit, what is the contribution margin per unit sold?

New Contribution Margin = New Price per unit – Variable cost per unit =$8.5-$2.5 =$6

3371. Costs that remain constant in total dollar amount as the level of activity changes are called:

These were my findings when I did my CVP analysis: The sales volume variance was negative (63,000) and unfavorable. Secondly, units sold category had only 47,000 units that were sold when 50,000 were planned for. The 3,000 less units sold affected Revenues and the Gross Margin. When relating the flexible budget to actual amounts, revenue was favorable and the flexible budget variance was $4,700. However, the outcomes of the other costs were unfavorable. Like gross margin, had an unfavorable flexible budget variance of $17,296. In addition, breakeven point discloses the maximum amount of profit that can be made. Its quantity is computed by dividing contribution margin by fixed costs (“Breakeven Point”). Similarly, the break-even revenues are calculated by taking the break-even point in units and multiplying it by the selling price. MDE Manufacturing Budget

Cost allocation is a very crucial procedure for many companies- not just production companies, but also in companies that provide service. Cost allocation has one purpose and that is to enable the determination of the cost of a product per unit in production companies and the cost of a provided service in service companies. Therefore, methods for cost allocation directly affect the service or product profitability assessment and at the same time sway segment and company profitability. The main problem is the choice of the cost allocation accounting approach. There are certain methods for cost allocation that do not apply the same to every company. If the method for

By using marginal costing, it is easy to calculate the net profit is 400 pounds. However, the result will be 560 if we use full costing. Thus, under the marginal costing, profit is strongly related to sale quantity rather than produce quantity. The difference (160 pounds) between these two methods is from the inventory product’s fixed cost. It is apparent that fixed cost should be ignored when making produce (or input) quantity decision due to fixed cost is irrelevant to produce quantity. By avoiding arbitrary

Contribution Margin per Unit = Selling Price per unit – Total Variable Cost per Unit

This case, as the Happy Chips Case does, illustrates the point that it is important to know where your costs and profits come from. It extends the point of Happy Chips by also introducing consideration of asset investments and return on assets. In this case, a new cost accountant introduces segmental profitability, contribution margin, and the strategic profit model to Cooper Processing Company to aid in analysis of two different distribution channels. Note to Instructors: Because this case is short and the required math is quite simple, we often use this case as part of an exam or an in-class quiz!

In an ideal situation, information for decision making should be both perfectly relevant and precisely accurate. However, in reality, such information is often too difficult or too costly to obtain. The degree to which information is relevant or precise often depends on the degree to which it is qualitative or quantitative. (Horngren et al, 2008) Since primary classification of costs on the income statement are by three major management functions: manufacturing, selling, and administrative, it will be definitely most relevant accounting information for Guillermo to consider. Some income statements track fixed and variable costs using the contribution approach, whereas others adopt the absorption approach that considers all direct and indirect manufacturing costs to be product costs. Both, the contribution approach and the absorption approach can be relevant for decision making. However, the key to decision making is not relying on a hard and fast rule about what to include and what to ignore. (Horngren et al, 2008) Thus, Guillermo will need to analyze all pertinent costs and revenues to determine what is and what is not relevant for his particular decision.

The addition of the expansion product helps to absorb the fixed factory and sales expenses and results in the existing product to be $0.55 less per unit. The selling price of the expansion product will also be an important factor. Assuming ABC Company wants a 40% gross margin for the new product, the set selling price for the expansion product should be $83.67. Assuming the same sales mix of these two products, the contribution margin for the current product is 55% and the contribution margin for the expansion product is 87%. The contribution margin informs ABC Company that to break-even, 58,097 units would need to be produced for the current product and 5,341 units produced of the expansion project would be needed. According to product cost information, the expansion product would be beneficial for ABC Company because the expansion product benefits the fixed costs of the current product.

To prepare the contribution margin statement it is necessary to assess which costs are variable and which are fixed. The variable costs are those which are incurred as each unit is produced, varying with the production levels, while the fixed costs remain the same regardless of the level of production (Bragg, 2012). The foundation of contribution costing is to deduct the variable costs from the revenue that is realized for each unit sold, this is known as the contribution as it is this surplus of revenue after variable costs will contribute towards the fixed costs, and then provide for the profit (Drury, 2006; Watts, 2004). The absorption statement may be converted into a contrition statement as shown in table 1.

profit. However, by using the ABC method to analyze and allocate "other operating costs" to each of the market segments the

The competitive situation faced by Wilkerson is quite severe. Price cutting in its main product has led to a huge drop in profit. While price increase in another product line partially made up the loss. We will discuss the detailed situation line by line.

a2. The marginal revenue (MR) to marginal cost (MC) approach uses marginal analysis by comparing (MR) and (MC).