Explore BrainMass
Share

Revenue, fixed costs, variable costs and contribution margin

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

NEED HELP IN DEFINING THE QUESTION AND READ THE GRAPHS

---

1. Define revenue, fixed cost, variable cost, and contribution margin.

2. What is meant by the term break-even point? Why are managers of a company interested in the break-even point?

3. "A change in fixed costs" in the second cell under break-even analysis. If fixed costs increase, what happens to the break-even level of output? Why?

[Image shown in attachment]

---

(See attachment for full problem)

© BrainMass Inc. brainmass.com October 24, 2018, 6:38 pm ad1c9bdddf
https://brainmass.com/business/sales-revenue/revenue-fixed-costs-variable-costs-contribution-margin-45321

Attachments

Solution Preview

1. Define revenue, fixed cost, variable cost, and contribution margin.

Income from sale of goods or services is called revenue. Fixed costs are those costs which do not change with sales volume. These costs remain fixed when sales volume increase or decrease over a range. If full capacity is achieved, then fixed costs would increase with increase in sales volume. Variable costs are those costs that change in direct proportion to the change in sales volume. Contribution Margin is the difference between the total revenues and total variable costs. The contribution margin goes towards meeting the fixed costs and if it exceeds the fixed costs then the difference is the profits.

2. The break-even point is where the ...

Solution Summary

The solution explains various terms and the usefulness of breakeven analysis

$2.19
See Also This Related BrainMass Solution

Operating Data, Revenue, Contribution Margin and Costs

1. Helix Services, Inc., has been in business for six months. The following are basic operating data for that period.

Month July Aug. Sept. Oct. Nov. Dec.
Service hours 120 136 260 420 320 330
Revenue $6,000 $6,800 $13,000 $21,000 $16,000 $16,500
Operating costs $4,300 $5,300 $ 7,100 $11,200 $ 9,100 $10,600

Required
a. What is the average service revenue per hour for the six-month time period?
b. Use the high-low method to estimate the total monthly fixed cost and the variable cost per hour.
c. Determine the average contribution margin per hour.
d. Use the scattergraph method to estimate the total monthly fixed cost and the variable cost per hour.
e. Compare the results of the two methods and comment on the difference.

2. Freescale Manufacturing Company makes a product that it sells for $50 per unit. The company incurs variable manufacturing costs of $14 per unit. Variable selling expenses are $6 per unit, annual fixed manufacturing costs are $189,000, and fixed selling and administrative costs are $141,000 per year.

Required
Determine the break-even point in units and dollars using each of the following approaches:
a. Equation method.
b. Contribution margin per unit.
c. Contribution margin ratio.
d. Confirm your results by preparing a contribution margin income statement for the break-even sales volume.

3. Bella Company is considering the addition of a new product to its cosmetics line. The company has three distinctly different options: a skin cream, a bath oil, or a hair coloring gel. Relevant information and budgeted annual income statements for each of the products follow.

Relevant Information
Skin Cream Bath Oil Color Gel
Budgeted sales in units (a) 71,000 111,000 39,000
Expected sales price (b) $8 $4 $12
Variable costs per unit (c) $5 $2 $7
Income statements
Sales revenue (a x b) $568,000 $444,000 $468,000
Variable costs (a x c) (355,000) (222,000) (273,000)
Contribution margin 213,000 222,000 195,000
Fixed costs (153,000) (186,000) (155,000)
Net income $ 60,000 $ 36,000 $ 40,000

Required
a. Determine the margin of safety as a percentage for each product.
b. For each product, determine the percentage change in net come that results from the 20% increase in sales. Which product has the highest operating leverage?
c. Assuming that management is pessimistic and risk averse, which product should the company add to its cosmetics line? Explain your answer.
d. Assuming that management is optimistic and risk aggressive, which product should the company add to its cosmetics line? Explain your answer.

View Full Posting Details