What is meant by the term contribution

Assignment Help Business Management

Reference no: EM131627874

MODULE TITLE: BUSINESS MANAGEMENT TECHNIQUES

TOPIC TITLE: COSTING TECHNIQUES

LESSON 2: MARGINAL COSTING

INTRODUCTION - The purpose of this lesson is to introduce marginal costing which is an alternative costing technique to the absorption costing method. Marginal costing can be used in break-even analysis which enables a business to calculate the level of activity at which it needs to operate if it is to survive. Further applications for marginal costing will be studied in the next lesson when the underlying principles have been understood.

YOUR AIMS - At the end of this lesson you should be able to:

distinguish between fixed, variable and semi-variable costs
understand how semi-variable costs are treated by the marginal costing technique
understand the marginal costing technique and be able to calculate the contribution and the contribution ratio of a product
apply break-even analysis to a single product and a multi-product business
appreciate the underlying assumptions behind break-even analysis especially when applying the technique.

QUESTIONS -

1. Define semi-variable cost. Use graphs to illustrate your answer.

2. What is meant by the term 'contribution'?

3. What is the contribution per unit for the following business?

Wallop Ltd	£
Sales	150,000	12,000 units
Direct labor	60,000
Direct Materials	36,000
Rent/Rates	10,000
Power for Machines	6,000
Production licence	2,000

4. (a) What is the contribution ratio of Wallop Ltd based on the above figures?

(b) What is the contribution if sales are:

(i) 10 000 units

(ii) 30 000 units

(iii) 14 000 units?

5. Using a break-even chart, calculate the break-even point for Wallop Ltd.

6. Based on expected sales of 12 000 units what is the margin of safety for Wallop Ltd?

7. State in which departments of a large industrial organisation a 'What if Analysis' might prove of benefit.

Reference no: EM131627874

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