ACCT 002 Lecture Notes - Lecture 13: Contribution Margin, Direct Labor Cost, Sunk Costs

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blackpig616

19 Aug 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 002

Professor

cooper

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Document Summary

Provides an income stmt that distinguishes between fixed & variable costs. Separates costs into fixed & variable categories. Sales - variable expenses = contribution margin. Differential cost difference in costs between 2 alternatives. Differential revenue = difference in revenues between 2 alternatives. Marginal revenue revenue that can be obtained by selling 1 more unit of product. Marginal cost cost of selling 1 more unit. Opportunity cost is potential benefit that is given up when 1 alternative is chosen over another. Sunk cost is cost that has already been incurred. Only differential costs are relevant in a decision so sunk costs s/b ignored. Cost structure is relative proportion of each type of cost in an org. Prime cost is sum of direct cost and direct labor. Conversion cost is sum of direct labor cost & mfg overhead cost. Committed fixed costs = org investments w/ multiyear planning that can"t be reduced w/o making fundamental changes.

Related Questions

Question 1 10 pts A segment of a business probably should bediscontinued if its contribution margin exceeds its controllablefixed costs and its common costs. it cannot produce a contributionmargin. its common costs exceed its contribution margin. it has anet loss. Flag this Question Question 2 10 pts Contribution marginis calculated by deducting fixed costs from revenue. deductingvariable costs and controllable fixed costs from revenue. deductingvariable costs and common costs from revenue. deducting variablecosts from revenue. Flag this Question Question 3 10 pts Which ofthe following is the first step in the decision-making process?Identify workable alternatives Define the problem Considerappropriate nonfinancial factors Evaluate the cost and revenue dataFlag this Question Question 4 10 pts Fixed manufacturing costs arewritten off as current expenses of the period in which theyoccurred when using direct costing. standard costing. absorptioncosting. differential costing. Flag this Question Question 5 10 ptsDirect costing differs from absorption costing in that underabsorption costing all fixed manufacturing overhead is expensed inthe current period. under direct costing all fixed overhead isexpensed in the current period. under absorption costing anincrease in finished goods inventory does not affect the amount offixed costs expensed. under direct costing a portion of the fixedmanufacturing overhead is included in the finished goods inventory.Flag this Question Question 6 10 pts Which is the final step in thedecision-making process? Evaluate the cost and revenue dataIdentify workable alternatives Consider appropriate nonfinancialfactors Make a decision Flag this Question Question 7 10 pts Whichof the following is NOT a consideration when determining whether tocontinue making a part or to buy that part? the opportunity costthe timing of the cash receipts and expenditures the impact onemployees the sunk cost Flag this Question Question 8 10 pts Coststhat are not directly traceable to a segment of a business arecalled sunk costs. common costs. fixed costs. incremental costs.Flag this Question Question 9 10 pts Which of the following shouldNOT be a consideration when deciding whether to make or buy a part?impact on continued supply of the part impact on quality of thepart under each set of circumstances impact on sales to existingcustomers impact on factory employee morale Flag this QuestionQuestion 10 10 pts In making a decision to replace a machine, whichof the following is not relevant? the variable costs of operatingthe old machine the training that workers will need in order to usethe new machine the book value of the old machine the variablecosts of operating the new machine

lilacraccoon844

If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would:

a. increase.

b. remain the same.

c. decrease.

d. increase or decrease, depending upon the percentage increase in wage rates.

Zeke Company sells 25,000 units at $21 per unit. Variable costs are $10 per unit, and fixed costs are $75,000. The contribution margin ratio and the unit contribution margin are:

a. 53% and $7 per unit.

b. 47% and $11 per unit.

c. 52% and $11 per unit.

d. 47% and $8 per unit.

If sales are $500,000, variable costs are 75% of sales, and operating income is $40,000, what is the operating leverage?

a. 0

b. 1.3

c. 3.1

d. 1.25

Which of the following describes the behavior of the fixed cost per unit?

a. Increases with increasing production

b. Remains constant with changes in production

c. Decreases with increasing production

d. Decreases with decreasing production

If variable costs per unit decreased because of a decrease in utility rates, the break-even point would:

a. increase.

b. increase or decrease, depending upon the percentage increase in utility rates.

c. decrease.

d. remain the same.

Costs that vary in total in direct proportion to changes in an activity level are called:

a. differential costs.

b. fixed costs.

c. variable costs.

d. sunk costs

Which of the following conditions would cause the break-even point to increase?

a. Total fixed costs decrease

b. Unit variable cost decreases

c. Unit variable cost increases

d. Unit selling price increases

In cost-volume-profit analysis, all costs are classified into the following two categories:

a. discretionary costs and sunk costs

b. variable costs and fixed costs

c. mixed costs and variable costs

d. sunk costs and fixed costs

ochrespider8

Case 9-6: Profit PlanningâChoice of CostStructure

The owner of a package delivery business is currently evaluatingthe choice between two different cost structures, based on how thedelivery personnel are paid. One option (hereafter, âAlternative#1â) has relatively higher short-term fixed costs, while the otheroption (hereafter, âAlternative #2â) has the reverseâthat is,relatively higher variable costs in its cost structure. (Forsimplicity in this example we hold the delivery cost per package,that is, the selling price per unit is constant. Selling price isindependent of the cost-structure choice.) The following tablecontains pertinent information for creating the CVP model for eachdecision alternative:

Decision Inputs (Data)	Cost Structure Alternative #1	Cost Structure Alternative #2
Delivery price (i.e., revenue) per package	$60	$60
Variable cost per package delivered	$48	$30
Contribution margin per unit	$12	$30
Fixed costs (per year)	$600,000	$3,000,000

Requirements

1. What is meant by the term âshort-term profit-planningâ model,and how can such a model be used by management? (That is, in whatsense can this model be used to facilitate planning, control, ordecision-making by managers of an organization?)

2. What are the definitions of fixed costs, variable costs,contribution margin ratio, contribution margin per unit, andrelevant range?

3. What is the break-even point, in terms of number ofdeliveries per year (or per month), for Alternative #1? ForAlternative #2?

4. How many deliveries would have to be made under Alternative#1 to generate a pre-tax profit, Ï_B, of $25,000per year?

5. How many deliveries (per month or per year) would have to bemade under Alternative #1 to generate a pre-tax profit,Ï_B, equal to 15% of sales revenue?

6. How many deliveries would have to be made under Alternative#2 to generate an after-tax profit, Ï_A, of$100,0000 per year, assuming a tax rate of, say, 45%?

7. Assume that for the coming year total fixed costs areexpected to increase by 10% for each of the two alternatives. Whatis the new break-even point, in terms of number of deliveries, foreach decision alternative? By what percentage did the break-evenpoint change for each case? How do these figures compare to thepercentage increase in budgeted fixed costs?

8. Assume an average income-tax rate of 40%. What volume (numberof deliveries) would be needed to generate an after-taxprofit, Ï_A, of 5% of sales for each alternative?

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ACCT 002 Lecture Notes - Lecture 13: Contribution Margin, Direct Labor Cost, Sunk Costs

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