Managerial Accounting: Chapter Six

Determine sales mix when a company has limited resources.

-Must find the contribution margin per unit of limited resources. -This amount is then multiplied by the units of limited resource to determine which product maximizes net income. This amount is then multiplied by the units of limited resource to determine which product maximizes net income. Info Needed: Unit contribution margin, limited resource required per unit

Indicate how operating leverage affects profitability.

-Operating leverage refers to the degree to which a company's net income reacts to a change in sales -Determined by a company's relative use of fixed versus variable costs -Companies with high fixed costs relative to variable costs have high operating leverage -A company with high operating leverage experiences a sharp increase (decrease) in net income with a given increase (decrease) in sales. -The degree of operating leverage is measured by dividing contribution margin by net income.

Explain the term sales mix and its effects on breakeven sales.

-Sales mix is the relative proportion in which each product is sold when a company sells more than one product. -For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. -If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars is calculated using the weighted-average contribution margin ratio.

Explain the differences between absorption costing and variable costing

Absorption Costing -Fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs. -If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. -If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period. Variable Costing -Consistent with cost-volume-profit analysis. -Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. -The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company's profitability.