Variable and Fixed Cost Analysis

Variable and Fixed Cost Analysis

Variable and fixed costs

Contribution margin income statement assuming selling price of $250 per unit

Contribution margin income statement (assuming sales price is $250 per unit Sales (250 * 8000) 2,000,000 Less: Variable costs Direct Materials (100*8000) (800,000)

Direct Labor (50 * 8000) (400,000)

Variable Overhead (30 * 8000) (240,000)

Variable selling and administrative (10 * 8000) (80,000)

total variable costs (1,520,000)

Contribution margin 480,000 Less: Fixed costs Fixed manufacturing overhead (200,000)

Fixed selling and administrative (100,000)

total fixed costs (300,000)

Net income 180,000

Contribution margin income statement assuming selling price of $280 per unit

Contribution margin income statement (assuming sales price is $280 per unit) Sales (280 * 8000) 2,240,000 Less: Variable costs Direct Materials (100*8000) (800,000)

Direct Labor (50 * 8000) (400,000)

Variable Overhead (30 * 8000) (240,000)

Variable selling and administrative (10 * 8000) (80,000)

total variable costs (1,520,000)

contribution margin 720,000 Less: Fixed costs Fixed manufacturing overhead (200,000)

Fixed selling and administrative (100,000)

total fixed costs (300,000)

Net income 420,000

Number of Units Company must sell to break even

Break even point is the quantity which the company must sell to get into the position of no loss. At breakeven point, the company is neither earning profits nor bearing losses. Hence it is the quantity where revenues are equal to costs. It can be calculated by using formula given below

Breakeven point = Fixed costs / contribution margin per unit

Breakeven point = 300,000 / 60

Breakeven point = 5,000

Fixed costs Fixed manufacturing overhead 200,000 Fixed selling and administrative 100,000 total fixed costs 300,000 total contribution margin 480,000 number of units sold 8,000 contribution margin per unit

60

Hence Herrestad Company needs to sell 5,000 units per annum to achieve breakeven.

Break even assuming direct materials cost increase from $100 to $120.

Breakeven point = Fixed costs / contribution margin per unit

Breakeven point = 300,000 / 40

Breakeven point = 7,500

Fixed costs Fixed manufacturing overhead 200,000 Fixed selling and administrative 100,000 total fixed costs 300,000 total contribution margin assuming direct materials of $120 Sales (250 * 8000) 2,000,000 Less: Variable costs Direct Materials (120*8000) (960,000)

Direct Labor (50 * 8000) (400,000)

Variable Overhead (30 * 8000) (240,000)

Variable selling and administrative (10 * 8000) (80,000)

total variable costs (1,680,000)

contribution margin 320,000 number of units sold 8,000 contribution margin per unit

40

Hence the breakeven quantity of output increases from 5,000 to 7,500 units if direct material cost per unit increases from $100 per unit to $120 per unit. It is desirable for any company to achieve its breakeven output as soon as possible so that it can enter the profitability region.

MOD 3

Difference between absorption and contribution margin income statements

The absorption and contribution income statements are both used to communicate a company's revenues, expenses and profits or losses for the period. The main difference lies in the origin of net income under both the formats and understanding of income statements.

Basics

Under absorption or full costing, variable and fixed ...