Contribution Margin
This costing method shows up on a Contribution Margin income statement
What is Variable Costing?
This type of cost remains constant in total, regardless of the level of production.
What is a fixed cost?
This formula tells you the number of units that must be sold to cover all fixed and variable costs.
What is Breakeven in Units = Fixed Costs / Contribution Margin per Unit?
Cost that differs between alternatives and pertains to the future.
What is a relevant cost?
A product sells for $20 and has a variable cost of $12. Find the CM per unit.
What is $8?
This formula is used to calculate for contribution margin per unit
What is Sales Revenue (per unit) minus Variable Cost (per unit)?
This type of cost changes in total as activity levels change, but remains constant per unit.
What is a variable cost?
This formula helps determine how much extra you're selling beyond your break-even point in units.
What is Margin of Safety in Units = Expected Sales in Units – Breakeven Sales in Units?
If fixed costs are unavoidable, doing this to a segment with a small contribution margin will actually decrease income.
What is discontinuing the segment?
A company has fixed costs of $5,000 and a CM per unit of $25. How many units must they sell to break even?
What is 200 units?
The contribution margin tells you how much revenue is left over to cover these two things after variable costs are paid.
What are fixed costs and profit?
This is the term for a cost that has both fixed and variable components.
What is a mixed cost?
You expect $60,000 in sales, but your break-even is $45,000. This formula helps you calculate your cushion.
What is Margin of Safety in Dollars = Expected Sales in Dollars – Breakeven Sales in Dollars?
A company deciding whether to sell a defective product "as is" or rework it for profit is performing this type of analysis.
What is incremental analysis?
A company expects to sell 2,000 units and break-even sales are 1,600 units. Find the margin of safety.
What is 400 units?
This is the formula for calculating the contribution margin ratio.
What is Contribution Margin per Unit ÷ Sales Price per Unit?
This method is commonly used to separate mixed costs into fixed and variable components using coordinates for activity levels.
What is the high-low method?
You use this formula when trying to hit a certain income goal and want to know how many units to sell.
What is Target Profit in Units = (Fixed Costs + Operating Income) / Contribution Margin per Unit?
Contribution margin increases and breakeven sales decrease when this cost behavior change happens.
What is variable cost per unit decreases?
Fixed costs are $10,000 and the CM ratio is 40%. Solve for break-even in sales dollars.
What is $25,000?
A company sells 1,000 units at $50 each, with a variable cost per unit of $30 and total fixed costs of $15,000. Calculate the operating income.
$20 = CM per unit
$20,000 = TCM
$20,000 - $15,000 = $5,000 operating income
A company has total costs of $12,000 at 400 units and $18,000 at 800 units. Use the high-low method to find the variable cost per unit and fixed cost.
High activity: 800 units → $18,000
Low activity: 400 units → $12,000
$6,000/400 units = $15 VC per unit
12,000 = (15×400) + Fixed Cost
12,000 = 6,000 + Fixed Cost
$6,000 Fixed Cost
If your total contribution margin is $80,000 and operating income is $20,000, use this formula to calculate the degree of responsiveness in income to sales changes.
What is Operating Leverage Factor = Total Contribution Margin ÷ Operating Income = 4?
You would choose to do this if the incremental costs of making something ourselves exceeds the cost of acquiring it from a third party.
What is outsourcing (make vs. buy)?
A company sells a product for $50 that has a variable cost of $30 per unit. The total fixed costs are $12,000. Solve for break-even in units.
What is 600 units?