Marginal Costing (Contribution, CVP, Break-Even, P/V Ratio & Margin of Safety)
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What is marginal cost?
Cost of producing one additional unit; excludes fixed costs, includes only variable costs.
Define contribution in marginal costing.
Excess of sales price over variable cost per unit; first recovers fixed costs, then becomes profit.
What separates marginal costing from absorption costing?
Marginal costing charges only variable costs to products; absorption costing allocates fixed costs too.
State the CVP equation.
Profit = (Contribution per unit × Number of units) − Total Fixed Costs.
What is break-even point?
Activity level where fixed costs are exactly recovered; profit is zero.
Calculate BEP in units formula.
BEP (units) = Total Fixed Costs ÷ Contribution per unit.
Define Profit-Volume (P/V) Ratio.
Ratio of contribution per unit to sales price per unit; expressed as percentage.
What is Margin of Safety?
Amount of sales exceeding break-even point; cushion before losses occur.
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