chapter 2 and 3 exam #2
What happens if you reduce variable cost?
was due to fewer workers, less, labor, either from firing people, and starting to use machine over workforce
#9 are companies with predominately fixed cost structures likely to be more profitable?
Fixed costs can provide financial rewards with increases in volume, since increases in volume do not cause corresponding increases in fixed costs. This kind of cost behavior results in increasing profits (decreases in cost per unit). But this does not mean that companies with a fixed cost structure will be more profitable. Predominately fixed cost structures entail risks. Decreases in volume are not accompanied by decreases in costs, which can eventually result in losses (increases in cost per unit).
#2 how does a contribution margin income statement differ from the income statement used in financial reporting?
In the contribution margin income statement all variable costs are subtracted from sales revenues to determine the contribution margin before subtracting all fixed costs to derive profit. The traditional statement does not disclose contribution margin because cost of goods sold and operating expenses consist of both variable and fixed costs.
Dalton corporation manufactures faucets. The variable costs of production are $27 per faucet. Fixed costs of production are $600,000. Dalton sells the faucets for a price of $52 per unit. How many faucets must Dalton make and sell to break even?
S -VC - FC = 0 52x - 27x - 600000 = 0 x=24000 units
#6 if volume is increasing, would a company benefit more from a pure variable or a pure variable or a pure fixed cost structure? which cost structure would be advantageous if volume is decreasing?
With increasing volume a company would benefit more from a fixed cost structure because of operating leverage, where each sales dollar represents pure profit once fixed costs are covered. If volume is decreasing, the variable cost structure would be more advantageous because costs would decrease proportionately with decreases in volume. With a pure fixed cost structure, costs stay constant even when sales revenue is decreasing, eventually resulting in a loss.
#1 define fixed cost and variable cost and give an example of each
1. A fixed cost is a cost that in total remains constant as volume of activity changes but on a per unit basis varies inversely with changes in volume of activity. A variable cost is a cost that in total changes directly and proportionately with changes in volume of activity but on a per unit basis is constant as volume of activity changes. An example of a fixed cost is a supervisor's salary in relation to units produced. An example of a variable cost is direct materials cost in relation to units produced.
Dalton corporation manufactures faucets. The variable costs of production are $27 per faucet. Fixed costs of production are $600,000. Dalton sells the faucets for a price of $52 per unit. What is Dalton's break-even sales revenue?
24000 * 52 = 1,248,000
Dalton corporation manufactures faucets. The variable costs of production are $27 per faucet. Fixed costs of production are $600,000. Dalton sells the faucets for a price of $52 per unit. The marketing manager believes that sales would increase dramatically if the selling price were reduced to $47 per unit. How many faucets must dalton make and sell to earn a 180,000 profit, assuming the sales is set at $47 per unit? do you agree with the marketing manager about the price reduction? why or why not?
47x - 27x - 600000 = 180,000 x= 39,000 Sales $: 39000 * 47 = 1,833,000 -change in relevant range - to bet the competitors - in volume investor in some other equipment
Dalton corporation manufactures faucets. The variable costs of production are $27 per faucet. Fixed costs of production are $600,000. Dalton sells the faucets for a price of $52 per unit. How many faucets must Dalton make and sell to earn a $180,000?
52x - 27x - 600,000 = 180,000 X= 31200 THAN, 31,200 * 52 = 1,622,400
#7 would a fixed or variable cost structure be more advantageous if volume is decreasing?
A company with a variable cost structure would not suffer a loss as long as its sales price is equal to or greater than it variable cost per unit (i.e., the contribution margin is equal to or greater than zero.) This condition is not affected by decreasing volume of sales. On the other hand, another company with a fixed cost structure would need to have a positive contribution margin per unit and sufficient volume of sales to accumulate enough total contribution margin to offset its total fixed cost before any profit can be realized. In conclusion, a variable cost structure is more advantageous if volume is decreasing.
#13 between the variable cost structure and the fixed cost structure, which has the greater risk? Explain
A fixed cost structure would have more risk because profits vary more with changes in volume. Small changes in volume can cause dramatic changes in profits. In addition, with a fixed cost structure, losses occur until fixed costs are covered. Given high fixed costs, a company would need high volume to reap the rewards associated with this cost structure.
#1 what does the term break-even point mean? name the two ways it can be measured.
Break-even is the point where total revenue is equal to total costs. It can be measured in units or sales dollars.
#2 how can knowing cost behavior relative to volume fluctuations affect decision making?
Most business decisions are based on cost information. The behavior of cost in relation to volume affects total costs and cost per unit. For example, knowing that total fixed cost stays constant in relation to volume and that total variable cost increases proportionately with changes in volume affects a company's cost structure decisions. Knowing that volume is expected to increase would favor a fixed cost structure because of the potential benefits of operating leverage.
