CHAPTER 6 :star: :explode: (LO2 (Contribution Margin Ratio (Indicates the…
Fixed costs are costs that remain the same in total dollar
amount as the activity base changes.
Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)
Mixed costs have characteristics of both a variable and a
Variable costs are costs that vary in proportion to
changes in the level of activity.
Variable Cost per Unit = Difference in Total Cost / Difference in Production
HIGH LOW METHOD
cost elimination method that may be used to separate mixed costs into their fixed and variable components
Sales Mix Consideration
sales mix is the relative distribution of sales among
the various products sold by a company.
Many companies sell more than one product at different selling prices
Break-Even Sales= Fixed Costs/Unit Contribution Margin
Contribution Margin Ratio
Indicates the percentage each sales dollar available to cover fixed costs and to provide income from operations
Contribution Margin Ration = Contribution Margin/Sales
Unit Contribution Margin
Is the dollars available from each unit sales to cover fixed costs and provide operating profits
Unit Contribution Margin = Sales Price per Unit - Variable Cost per Unit
Is the excess of sales over variable
Contribution Margin = Sales – Variable Costs
cost-volume-profit chart/ break even
graphically shows sales, costs, and the
related profit or loss for various levels of units sold.
are earned when sales levels are to the right of the
break-even point (Operating Profit Area)
incurred when sales level are to the left of break-even point
(Operating Loss Area).
Primary Assumptions of
Total sales and total costs can be represented by
Within the relevant range of operating activity, the
efficiency of operations does not change.
Costs can be divided into fixed and variable
The sales mix is constant.
There is no change in the inventory quantities during
Revenue = Cost
Break-Even sales (units)
Fixed Costs/Unit Contribution Margin
Break-Even sales (Dollars)
Fixed Costs/ Contribution Margin Ratio
Effect of changes in fixed costs
Fixed Costs (Increase)
Fixed Costs (Decrease)
Effect of changes in Unit Variable Cost
Unit Variable Costs (Increase)
Break Even (Increase)
Unit Variable Costs (Decrease)
Break Even ( Decrease)
Effect of Changes In Unit Selling Price
Unit Selling Price (Increase)
Unit Selling Price (Decrease)
The sales volume required to earn a target profit is determined by
modifying the break-even equation.
Sales (units) = Fixed Costs + Target Profit/Unit Contribution Margin
Sales (dollars)=Fixed Costs + Target Profit/Contribution Margin Ratio