Chapter 6.5 Budget Constraints

Question 1

What is the formula for contribution margin in marginal costing?

Answer 1

Sales revenue - variable costs, or worded as;
Selling price - marginal cost

Question 2

Determining the product mix that maximises contribution and profit involves which steps?

Answer 2

1. Determine the budget constraint or limiting factor for materials and labour
2. Calculate the contribution per budget constraint or limiting factor per product, then rank.
3. Create an optimal production plan
4. Calculate the contribution to be earned from the optimal production plan

Question 3

What 3 steps should an organization follow to determine whether to produce a product/component or buy it in?

Answer 3

1. Calculate the contribution per unit for the two options
2. Compare the contribution per unit for each option to see which is higher
3. Determine other cost savings associated with the two options at different production or purchase levels, to estimate forecast profits

Question 4

True or false: marginal cost = direct materials + direct labour + variable overheads

Answer 4

True.