Nokia's managers rely on reports of variable costs. How can variable costing reports, prepared using the...
Nokia's managers rely on reports of variable costs. How can variable costing reports, prepared using the contribution margin format, help managers in computing break-even volume in units? Would you recommend a different method?
Homework Answers
For computing break-even volume in units, three values are needed: Total Fixed Cost for the period, Unit Selling Price, and Unit Variable Costs.
Unit Contribution Margin = Unit Selling Price - Unit Variable Cost
Break-even volume in units = Total Fixed Cost / Contribution Margin per Unit.
Since there are many items of cost ( like telephone expense, maintenance expense, utilities expense etc ) which cannot be precisely segregated into its fixed and variable components, the contribution margin approach might not give precise results.
Therefore, another approach could be to use the equation:
Total Revenues = Total Cost, since total revenues equal total costs at BEP.
Since the selling price per unit is known, let the break-even quantity be Q.
Unit Selling Price x Q = Total Cost
or Q = Total Cost / Unit Selling Price.
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