BSNS115 EXAM QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
Cost-Volume-Profit Analysis
Main tool of managers for decision making, looks at the relationship between the costs
of the firm and the volume of output they produce. Managers use this information to
investigate how each product is performing and how well the firm is keeping costs down
- vital for profit maximisation
Variable costs
Costs that only occur with production and change with the level of activity
Fixed costs
Costs that occur regardless of production and do not change with the level of activity
Relevant range
Working within a certain level of activity over which a cost pattern exists. Once we
exceed this level of activity, the cost pattern changes (usually FC)
Linearity
We assume that variable costs, and by extension total costs, increase at a constant rate
as the level of activity increases
Contribution margin
The difference between selling price and variable costs. It is the amount of revenue that
each unit or every unit generates to be used to pay for fixed cost of provide profit for the
,firm.
Total sales - Total variable costs
Unit contribution margin
Selling price per unit - Variable costs per unit
Contribution margin ratio
Contribution margin / sales
Non-linear relationships
It is unlikely that the relationship between sales, revenue, variable costs and sales
volume is going to follow a straight line
Stepped fixed costs
We assume that fixed costs all stay the same and increase together when production
exceeds the relevant range. In reality there will be many different types of fixed costs
each with their own relevant range
Multi-product business
In real life, most businesses have more than one product and fixed costs relate to
multiple products. So assigning fixed costs to one specific product becomes quite
complicated
Differential cost
Costs that change depending on which alternative you choose
Opportunity cost
If you have to choose between activity A and activity B, you give up the potential income
of activity B by choosing A. This income foregone from making a choice is the
opportunity cost
, Allocated costs
A cost that is common to many activities, so is arbitrarily split between activities.
Because these are previously decided and don't relate directly to the activity, they are
irrelevant for decision making purposes e.g. rent of a factory
Sunk cost
Costs that are already incurred. The firm has already done something to cause this cost
so it must be paid no matter what decision the firm makes e.g. cost of a printer
purchased last week
Quantitative analysis
Looking at the relevant numbers for the decision
Qualitative analysis
Looking at important factors for the decision that don't involve numbers
Product mix decision
Often a firm has a limited amount of resources so managers have to decide how these
scarce resources are efficiently utilized. The goal of this decision is to allocate scarce
resources to the most profitable activities. Fixed costs aren't affected by this decision,
so focus on maximizing the total contribution margin.
- The most profitable mix of products occurs when the contribution margin per limiting
factor is maximized.
Make or buy decision
This decision looks at whether a firm should buy an input to use in the production
process (outsourcing) or simply make it themselves
COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
Cost-Volume-Profit Analysis
Main tool of managers for decision making, looks at the relationship between the costs
of the firm and the volume of output they produce. Managers use this information to
investigate how each product is performing and how well the firm is keeping costs down
- vital for profit maximisation
Variable costs
Costs that only occur with production and change with the level of activity
Fixed costs
Costs that occur regardless of production and do not change with the level of activity
Relevant range
Working within a certain level of activity over which a cost pattern exists. Once we
exceed this level of activity, the cost pattern changes (usually FC)
Linearity
We assume that variable costs, and by extension total costs, increase at a constant rate
as the level of activity increases
Contribution margin
The difference between selling price and variable costs. It is the amount of revenue that
each unit or every unit generates to be used to pay for fixed cost of provide profit for the
,firm.
Total sales - Total variable costs
Unit contribution margin
Selling price per unit - Variable costs per unit
Contribution margin ratio
Contribution margin / sales
Non-linear relationships
It is unlikely that the relationship between sales, revenue, variable costs and sales
volume is going to follow a straight line
Stepped fixed costs
We assume that fixed costs all stay the same and increase together when production
exceeds the relevant range. In reality there will be many different types of fixed costs
each with their own relevant range
Multi-product business
In real life, most businesses have more than one product and fixed costs relate to
multiple products. So assigning fixed costs to one specific product becomes quite
complicated
Differential cost
Costs that change depending on which alternative you choose
Opportunity cost
If you have to choose between activity A and activity B, you give up the potential income
of activity B by choosing A. This income foregone from making a choice is the
opportunity cost
, Allocated costs
A cost that is common to many activities, so is arbitrarily split between activities.
Because these are previously decided and don't relate directly to the activity, they are
irrelevant for decision making purposes e.g. rent of a factory
Sunk cost
Costs that are already incurred. The firm has already done something to cause this cost
so it must be paid no matter what decision the firm makes e.g. cost of a printer
purchased last week
Quantitative analysis
Looking at the relevant numbers for the decision
Qualitative analysis
Looking at important factors for the decision that don't involve numbers
Product mix decision
Often a firm has a limited amount of resources so managers have to decide how these
scarce resources are efficiently utilized. The goal of this decision is to allocate scarce
resources to the most profitable activities. Fixed costs aren't affected by this decision,
so focus on maximizing the total contribution margin.
- The most profitable mix of products occurs when the contribution margin per limiting
factor is maximized.
Make or buy decision
This decision looks at whether a firm should buy an input to use in the production
process (outsourcing) or simply make it themselves
