ACC 310F Chapter Notes - Chapter 1: Fixed Cost, Variable Cost

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blackeagle417

9 Feb 2017

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We can only classify a cost or benefit as a variable, mixed, or fixed as it related to a specific activity and/or a specific time horizon. Ex. gym"s rent is fixed for short-term decision but variable for long-term. Is the relation between a cost or a benefit and an activity: A) a variable cost is proportional to the volume of activity. B) a fixed cost does not change as the volume of activity changes. C) a mixed cost contains both fixed and variable components. For most businesses, sales volume (number of units sold) determine. Dell"s revenue vary with personal computer sales. Gym"s revenue reflect its current membership levels. Costs can be variable, fixed, or mixed with respect to sales volume. Variable costs for computer assembler include hard drives installed in its computer, cartons to pack computer, and hourly labor required to assemble computers.

Related Questions

	#1	Which of the following correctly describes fixed and variable cost behavior as total volume increases?
	A.	Unit fixed costs stay the same and unit variable costs increase.
	B.	Total fixed costs stay the same and total variable costs increase.
	C.	Unit fixed costs decrease and total variable costs decrease.
	D.	Unit fixed costs decrease and unit variable costs decrease.

	#2	The incremental profit generated by the sale of one additional unit is equal to the
	A.	contribution margin per unit.
	B.	selling price.
	C.	margin of safety.
	D.	incremental cost.

	#3	Clipper Office Furniture uses cost-plus pricing with a 40% mark-up on total cost at capacity. The company is currently selling 40,000 units at $19.60 per unit. Each unit has a variable cost of $9. In addition, the company incurs $200,000 in fixed costs annually. If demand falls to 32,000 units and the company wants to continue to earn a 40% return, what price should the company charge?
	A.	$15.25
	B.	$21.35
	C.	$19.60
	D.	$27.44

	#4	ABC company has $6.50 per unit in variable costs and $2.20 per unit in fixed costs at a volume of 40,000 units. If the company uses cost-plus 20% for pricing, which of the following should the company use to determine the price?
	A.	The company should use a unit cost of $8.70 per unit only at a volume of 40,000 units.
	B.	The company should use a unit cost of $8.70 at any volume level.
	C.	The company should use a unit price of $10.44 at any volume level.
	D.	The company should ignore fixed costs for cost-plus pricing.

	#5	Which of the following is a grouping of overhead costs whose total is allocated using one allocation base?
	A.	Cost objective
	B.	Cost pool
	C.	Direct cost
	D.	Cost driver

	#6	Which one of the following is the preferred alternative when deciding between two options?
	A.	Incremental profit is greater than under the other alternatives.
	B.	Revenues are greater than under the other alternatives.
	C.	Expenses are less than under the other alternatives.
	D.	No opportunity or sunk costs exist.

#7	The required rate of return used to calculate an investmentâs net present value is related to the firmâs
A.	contribution margin.
B.	cost of capital.
C.	total assets.
D.	Price/Earnings ratio.

#8	A company is trying to decide whether to keep or drop the organic foods department in its grocery store. If organic foods are dropped, the manager will be laid off. What is the manager's salary in relation to the decision to keep or drop the department?
A.	A variable cost and therefore relevant
B.	Avoidable and therefore incremental
C.	Sunk and therefore not relevant
D.	A fixed cost and therefore not relevant

#9	The following information relates to Ajax Widgets during the year. There was no beginning inventory.
	Units produced	11,000
	Units sold	10,000
	Units in ending inventory	1,000
	Fixed manufacturing overhead	$220,000
	How much fixed manufacturing overhead will be expensed during the year (included in Cost of Goods Sold) using full costing?
A.	$220,000
B.	$200,000
C.	$20,000
D.	$10,000

#10	If the required rate of return is greater than the internal rate of return of a potential investment, the company should judge the investment as acceptable.
A.	This is a True statement
B.	This is a False statement
C.	Not enough information provided.

#11	The basic concept involved in time value of money calculations is that
A.	it is better to receive a dollar in the future than to receive a dollar today
B.	incremental revenues must exceed incremental costs.
C.	it is better to receive a dollar today than to receive a dollar in the future.
D.	it can only be applied to positive cash flows

#12	Hanson Sports has three product lines: footballs, basketballs, and bats. Common costs are allocated based on relative sales. A product line income statement for the year ended December 31, 2016 follows:
		Footballs	Basketballs	Bats	Total
	Sales	$600,000	$800,000	$400,000	$1,800,000
	Cost of goods sold	260,000	400,000	230,000	890,000
	Gross margin	340,000	400,000	170,000	910,000
	Less other variable costs	85,000	120,000	80,000	285,000
	Contribution margin	255,000	280,000	90,000	625,000
	Less direct salaries	50,000	60,000	45,000	155,000
	Less common fixed costs	85,000	100,000	55,000	240,000
	Net income	$120,000	$120,000	-$10,000	$230,000

	Since the profit for bats is a net loss, the company is considering dropping this product line. What is the incremental $ effect on total net income of dropping the Bats line?


#13	Right Air Supply sells a specialized air filter that has a variable cost of $10 each.
	Fixed costs are estimated to be $700,000 across all levels of sales shown below.
	Units Sold	Unit Price	CM per unit x Qty	Fixed Costs	Profit
	90,000	$33		700,000
	100,000	$31		700,000
	110,000	$30		700,000
	120,000	$28		700,000
	Which price should Right Air Supply charge to maximize profits?


#14	Randolph Corporation sells a single product at a price of $275 per unit. Variable cost per unit is $135 and fixed costs total $356,860. If sales are expected to be $825,000, what is the companyâs margin of safety?


#15	Roger Excavating Company experienced the following costs in 2016:
	Direct materials	$1.75 per unit
	Direct labor	$2.00 per unit
	Variable manufacturing overhead	$2.50 per unit
	Variable selling	$0.75 per unit
	Fixed manufacturing overhead	$50,000
	Fixed selling	$15,000
	Fixed administrative	$5,000
	During 2016, the company manufactured 100,000 units and sold 80,000 units. If the average selling price per unit was $22.65, what is the amount of the companyâs contribution margin per unit?

sapphireeagle929

Quiz 5 Name:________________________

Part I: True or False Question and Fill in Blank.

1. T or F: The planning horizon for a discretionary fixed costusually encompasses many years.

2. Tor F: Committed fixed costs are those that relate to theinvestment in facilities, equipment and the basic organizationalstructure of a company.

3. T or F: The high-low method uses cost and activity data fromjust two extreme volume levels (periods) to establish a costformula.

4. T or F: On an income statement prepared by the traditionalapproach, costs are organized and presented according tofunction.

5. T or F: Contribution margin is defined as sales lessdiscretionary fixed costs.

6. T or F: The contribution format is widely used for preparingexternal financial statements.

7. T or F: Reynold Enterprises sells a single product for $25.The variable expense per unit is $15 and the fixed expense per unitis $5 at the current level of sales. The company's net operatingincome will increase by $5 if one more unit is sold over BEP.

8. T or F: Incremental analysis is an analytical approach thatfocuses on those items of revenue and cost that will change as aresult of a decision.

9. T or F: On a CVP graph for a profitable company, the totalrevenue line will be steeper than the total expense line.

10. T or F: The impact on net operating income of a given dollarchange in sales can be computed by applying the contribution marginratio to the dollar change in sales.

11. T or F: The larger the contribution margin ratio, thesmaller the amount of sales required to cover a given amount offixed expenses.

12. T or F: Fawn Company's margin of safety is $90,000. If thecompany's sales drop by $80,000, it will still have positive netoperating income.

13. T or F: The margin of safety can be defined as the amount bywhich sales can decrease before losses are incurred by the company.

14. Mark Company currently sells a video recorder with a sellingprice of $300 per unit. The variable expense per unit is $175 andfixed expenses are $100,000. If the company reduces variableexpenses by $20 per unit and increases the fixed expenses by$10,000, the break-even point will __increase or decrease__.

15. The degree of operatingleverage is computed by dividing contribution margin by______________.

16. The variable expenseper unit is $12 and the selling price per unit is $40. Then thecontribution margin ratio

is _____________%.

17. Long Companyâsvariables expenses are 60% of sales. A $1,200 increase in thecompanyâs fixed expenses will

increasethe break-even point in sales by $ _______________.

Part II: Classification of Costs asPeriod or Product Cost (@1/2)

1. ______________Depreciation on salespersonsâ cars.

2. ______________Rent on equipment used in the factory.

3. ______________Lubricants used for maintenance of machines.

4. ______________Salaries of finished goods warehouse personnel.

5. ______________Soap and paper towels used by factory workers at the end of ashift.

6. ______________Factory supervisorsâ salaries.

7. ______________Heat, water, and power consumed in the factory.

8. ______________Advertising costs.

9. ______________Workersâ compensation insurance on factory employees.

10. ______________ Attractivelydesigned box for packaging the companyâs product.

brownmallard872

Post-Audit and Reevaluation of Investment Proposal: IRR

Throughout his four years in college, Ronald King worked at the local Beef Burger Restaurant in

College City. Although the working conditions were good and the pay was not bad, Ron believed he

could do a much better job of managing the restaurant than the current owner-manager. In particular,

Ron believed that the proper use of marketing campaigns and sales incentives, such as selling a second

burger for a 25 percent discount, could increase annual sales by 40 percent.

Just before graduation in 2016, Ron inherited $500,000 from his great uncle. He seriously con-

sidered buying the restaurant. It seemed like a good idea because he liked the town and its college

atmosphere, knew the business, and always wanted to work for himself. He also knew that the cur-

rent owner wanted to sell the restaurant and retire to Florida. As part of a small business management

course, Ron developed the following income statement for the restaurantâs 2015 operations:

BEEF BURGER RESTAURANT: COLLEGE CITY

Income Statement

For Year Ended December 31, 2015

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450,000

Expenses

Cost of food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Employee expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000

Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000

Property taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000

436,000

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000

Ron believed that the cost of food and supplies were all variable, the employee expenses and utilities

were one-half variable and one-half fixed in 2015, and all other expenses were fixed. If Ron purchased

the restaurant and followed through on his plans, he believed there would be a 40 percent increase

in unit sales volume and all variable costs. Of the fixed costs, only advertising would increase by

$12,000. The use of discounts and special promotions would, however, limit the increase in sales

revenue to only 30 percent even though sales volume increased 40 percent.

Required

a. Determine

1. The current annual net cash inflow.

2. The predicted annual net cash inflow if Ron executes his plans and his assumptions are correct.

b. Ron believes his plan would produce equal net cash inflows during each of the next 15 years, the

period remaining on a long-term lease for the land on which the restaurant is built. At the end of

that time, the restaurant would have to be demolished at a predicted net cost of $80,000. Assum-

ing Ron would otherwise invest the money in stock expected to yield 12 percent, determine the

maximum amount he should pay for the restaurant.

c. Assume that Ron accepts an offer from the current owner to buy the restaurant for $350,000.

Unfortunately, although the expected increase in sales volume does occur, customers make much

more extensive use of the promotions than Ron had anticipated. As a result, total sales revenues are

8 percent below projections. Furthermore, to improve employee attitudes, Ron gave a 10 percent

raise immediately after purchasing the restaurant. Reevaluate the initial decision using the actual

sales revenue and the increase in labor costs, assuming conditions will remain unchanged over the

remaining life of the project. Was the investment decision a wise one? (Round calculations to the

nearest dollar.)

d. Ron can sell the restaurant to a large franchise operator for $250,000. Alternatively, he believes

that additional annual marketing expenditures and changes in promotions costing $20,000 per

year could bring the sales revenues up to their original projections, with no other changes in costs.

Should Ron sell the restaurant or keep it and make the additional expenditures? (Round calcula-

tions to the nearest dollar.) (Hint: Ron has just bought the restaurant.)

ceruleantermite111

ACC 310F Chapter Notes - Chapter 1: Fixed Cost, Variable Cost

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