BMT: Contribution (HL)

Question 1

What is make or buy analysis?

Answer 1

Make or buy analysis is a quantitative tool that involves a business choosing between making (manufacturing) a product in-house or to purchase it from an external provider (outsourced supplier). Hence, a make or buy decision is also referred to as an outsourcing decision.

Question 2

How do you decide whether to make or buy a product/material?

Answer 2

If the CTM > CTB, the firm will use outsourcing or subcontracting, i.e., the firm should buy rather than make the product.
If the CTB > CTM, the firm will use insourcing (in-house production), i.e., the firm should makerather than buy the product.

however the firm must see:
- sufficient capacity + labour resources to make
- sufficient expertise
- whether supplier is reputable
- delivery times
- control

Question 3

What is contribution?

Answer 3

Contribution refers to the difference between a firm’s sales revenue of a product it sells and the variable costs of production. The surplus is used to “contribute” to the payment of the firm’s fixed costs. Any contribution over and above total costs of production is declared as profit for the firm.

Question 4

What is unit contribution?

Answer 4

Unit contribution represents the amount of money earned from each unit of the product sold to customers. It is the difference between a firm’s selling price (P) for a product and the average variable cost (AVC) of that product. It represents the amount of money earned from each unit of the product sold to customers.

Question 5

What is total contribution?

Answer 5

Total contribution is the unit contribution (P – AVC) multiplied by the quantity sold (Q), i.e., (P – AVC) × Q. This is the amount used to pay fixed costs; any financial surplus that remains becomes profit for the firm.

Question 6

What is the formula for profit?

Answer 6

Profit = Contribution – TFC.

Question 7

What is a cost centre?

Answer 7

Acost centreis a division of a business that has responsibility for its own operational costs. The cost centre is held accountable for its departmental expenditure. They can help managers to collect and use cost data effectively, thereby having better budgetary control.

Question 8

What is a profit centre?

Answer 8

A profit centre is a section or division of a business organization that has both costs and revenues clearly identified and attributed to its operations, which are recorded for budgetary purposes.

Question 9

What is contribution costing?

Answer 9

Contribution costing is a quantitative technique used to calculate how many items need to be sold to cover all the firm’s costs (both variable and fixed costs). It enables managers to see the financial surplus (contribution) that a firm earns from each unit of product sold and whether that return is sufficient to allow it to earn profit overall, after deducting its fixed costs.

Question 10

What is the formula for total profit?

Answer 10

total contribution - total fixed costs

Question 11

What can contribution be used for?

Answer 11

to determine pricing (cost-plus pricing)

Question 12

What is absorption costing?

Answer 12

Absorption costing is a quantitative method of calculating the cost of a product by taking into account both indirect expenses (overhead costs) as well as direct costs (cost of sales), i.e., it calculates the total cost of producing a product.