Question

This is a five part question.

a. Define the term mixed cost and provide an example.

b. Provide two examples of costs that are likely variable costs.

c. Provide two examples of costs that are likely to be fixed costs.

d. Why total compensation paid to the sales force is likely to be mixed cost.

e. What is the total difference between contribution margin and contribution ratio?

Answer 1

(a) Mixed cost

Mixed cost is a cost which is composed of both fixed cost and variable cost. In other words, in mixed cost, some portion is fixed and some portion is variable.

For example, depreciation is a mixed cost since some portion of depreciation is fixed (it will take place even if the asset is not used) and some portion is variable (which varies with the use of the asset)

(b) Examples of variable costs - Raw material cost, Direct wages

(c)Examples of fixed cost- Salaries of management staff, Insurance premium, Factory rent

(d)Compensation payable to sales force is generally a mixed cost because some portion of their compensation is fixed and remaining portion is variable which depends on the level of sales obtained.

Compensation of sales force = Minimum salary (Fixed) + Salary as a % of sales (Variable)

(e) Difference between contribution margin and contribution ratio

Contribution margin refers to the difference between sales revenue and variable cost.

Contribution margin = Sales revenue - Variable cost

Contribution margin is an absolute value.

Contribution ratio is the ratio of contribution margin to sales.

Contribution ratio = (Contribution margin/Sales) x 100

Contribution ratio is expressed in %