Variable Cost and Contribution Margin Ratio

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

5.6 a. Profit analysis, or more formally, cost-volume-profit (CVP) analysis, is a type of analysis

11. When market price is P1, a profit-maximizing firm 's total revenue can be represented by the area a. P1 × Q2. b. P2 × Q2. c. P3 × Q2. d. P1 × Q3. 12. When market price is P4, a profit-maximizing firm 's total cost can be represented by the area a. P4 × Q1 b. P4 × Q4 c. P2 × Q4 d. Total costs cannot be determined from the information in the figure. 13. When market price is P1, a profit-maximizing firm 's total profit or loss can be represented by which area? a. P1 × Q3; profit b. (P3 – P1) × Q2 ; loss c. (P2 – P1) × Q1; loss d. We can 't tell because we don 't know fixed costs. 14. When a profit-maximizing firm 's fixed costs are considered sunk in the short run, then the firm a. can set price above marginal cost. b. must set price below average total cost. c. will never show losses. d. can safely ignore fixed costs when deciding how much output to produce. 15. A profit-maximizing firm in a competitive market is currently producing 200 units of output. It has average revenue of $9 and average total cost of $7. It follows that the firm 's a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units. b. average variable cost curve intersects the marginal cost curve at an output level of less than 200 units. c. profit is $400. d. All of the above are correct. 16. For a certain firm, the 100th unit of output that the firm produces has a marginal revenue of $10 and a marginal cost of $7. It

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.

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!

Cost-Volume-Profit (CVP) analysis is an important tool for managerial decision-making. CVP analysis “is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits” (Warren, Reeve, & Duchac, 2014, p. 970). When performing a CVP analysis fixed costs, variable costs, contribution margins, and break-even points are required.

Enlarging the operation scale is a indispensable way for manufactures when developing a company. Once fixed cost was determined, the more units produced, the more efficient that production becomes. Marginal costing is a very effective way of measuring whether economies of scale are saving the business capital. It perfectly avoids manipulation of short-term profit, overcoming the shortcoming of the full cost method, making significant contribution to short term production decisions. The following example will present this merit clearly:

This case study will look at Jokkmok Industries and one of its managers, Mr. Rosen, who is bucking for a promotion to CEO. His division uses absorption costing and has the ability to produce 50,000 units a quarter with a fixed overhead amount of $600,000. While the sales forecast shows that the company will only sell 25,000 units during each of the next two quarters, Mr. Rosen wants to double his budgeted production for the second quarter from 25,000 to 50,000 units. We will look at Mr. Rosen’s decision and see how it affects his company’s bottom line by putting the figures from last quarter and the next quarter into an absorption income statement and a contribution margin statement. From this we will be able to see the differences in

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.

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

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

A cost analysis can be conducted in order by companies in order to estimate their cost when making decisions (Douglas, 2012). Managers can various methods to analyze costs for decision making purposes these are total variable cost, average variable cost, marginal costs (Douglas, 2012). In addition the company can use profit maximization and marginal revenue to help make decisions (Douglas, 2012). This paper will analyze two different scenarios and use various methods to help them make the decisions at hand.

On the off chance that costs, unit costs, deals blend, working proficiency, or other significant components change, then the general CVP investigation and connections additionally should be adjusted. On account of these suppositions, cost information are of constrained

Cost-volume-profit analysis (CVP) is used by management accountants to identify the relationship between profit and the product price, sales volume, variable costs per unit and the total fixed manufacturing costs (Noreen, Brewer, & Garrison, 2011). Breakeven analysis is used in CVP in order to determine the level of sales that must be achieved in order for the company to break even. CVP analysis is primarily for management’s internal use as the metric and calculations are often not required to be disclosed to external stakeholders such as investors, regulators or financial institutions.

The last part of this report will focus into the company’s profit and how it can be predicted in relation to the changes in volume, costs and prices. It will look into the Cost Volume Profit analysis to do so in regards to the company selling multiple products. The report will conclude with the assumptions of CVP analysis.