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Questions and Answers
What does risk primarily refer to in a business context?
What does risk primarily refer to in a business context?
What does a fixed cost represent in terms of economic sacrifice?
What does a fixed cost represent in terms of economic sacrifice?
Which scenario outlines the consequences of risk for SPI?
Which scenario outlines the consequences of risk for SPI?
How can SPI mitigate the risk associated with fixed costs?
How can SPI mitigate the risk associated with fixed costs?
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What amount could SPI potentially lose if no tickets are sold?
What amount could SPI potentially lose if no tickets are sold?
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What is the total fixed cost that SPI is locked into regardless of ticket sales?
What is the total fixed cost that SPI is locked into regardless of ticket sales?
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What happens to SPI's income statement if no tickets are sold?
What happens to SPI's income statement if no tickets are sold?
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In a variable cost structure, how does the total variable cost behave with changes in activity level?
In a variable cost structure, how does the total variable cost behave with changes in activity level?
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How does the fixed cost per unit change as the activity level rises?
How does the fixed cost per unit change as the activity level rises?
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When there is no change in total fixed costs, what change occurs per unit basis as volume changes?
When there is no change in total fixed costs, what change occurs per unit basis as volume changes?
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In the relevant range, how does a fixed cost behave?
In the relevant range, how does a fixed cost behave?
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What effect do variable costs have per unit as the volume of activities changes?
What effect do variable costs have per unit as the volume of activities changes?
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How does a variable cost structure eliminate the risk of incurring a loss?
How does a variable cost structure eliminate the risk of incurring a loss?
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What does the variable cost per unit represent in a mixed cost scenario?
What does the variable cost per unit represent in a mixed cost scenario?
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In the mixed cost calculation, which of the following describes the total mixed costs formula?
In the mixed cost calculation, which of the following describes the total mixed costs formula?
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Given a fixed cost of $1,000 and a variable cost of $20 per hour, what would be the total cost for 40 hours of activity?
Given a fixed cost of $1,000 and a variable cost of $20 per hour, what would be the total cost for 40 hours of activity?
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In a restaurant chain, if the manager receives a salary and a bonus of 3 percent of sales, which type of cost is the bonus considered?
In a restaurant chain, if the manager receives a salary and a bonus of 3 percent of sales, which type of cost is the bonus considered?
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Which of the following statements about mixed costs is true?
Which of the following statements about mixed costs is true?
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What happens to total fixed costs when volume changes?
What happens to total fixed costs when volume changes?
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Which cost behaves in direct proportion to changes in volume?
Which cost behaves in direct proportion to changes in volume?
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How does the fixed cost per unit behave as volume increases?
How does the fixed cost per unit behave as volume increases?
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What is the purpose of understanding cost behavior for managers?
What is the purpose of understanding cost behavior for managers?
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What type of cost consists of both fixed and variable components?
What type of cost consists of both fixed and variable components?
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In the context of SPI paying the band for a concert, what type of cost is the payment considered?
In the context of SPI paying the band for a concert, what type of cost is the payment considered?
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Which statement about cost behavior is false?
Which statement about cost behavior is false?
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What is the nature of fixed costs based on the given scenarios?
What is the nature of fixed costs based on the given scenarios?
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What is the primary benefit of knowing the contribution margin?
What is the primary benefit of knowing the contribution margin?
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How do variable costs behave in relation to the number of tickets sold?
How do variable costs behave in relation to the number of tickets sold?
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What is the variable cost per ticket in the scenario provided?
What is the variable cost per ticket in the scenario provided?
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What happens to total variable cost if 3,000 tickets are sold?
What happens to total variable cost if 3,000 tickets are sold?
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In the fixed cost scenarios provided, what is the common annual rent?
In the fixed cost scenarios provided, what is the common annual rent?
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Why might a company choose to use variable costs over fixed costs?
Why might a company choose to use variable costs over fixed costs?
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What pattern is observed in the annual production units in the fixed cost scenarios?
What pattern is observed in the annual production units in the fixed cost scenarios?
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Which of the following statements about fixed and variable costs is true?
Which of the following statements about fixed and variable costs is true?
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What is the total cost incurred when producing 10,000 collars?
What is the total cost incurred when producing 10,000 collars?
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What is the fixed cost per unit when producing 12,000 collars?
What is the fixed cost per unit when producing 12,000 collars?
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Which statement best describes mixed costs?
Which statement best describes mixed costs?
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Using the mixed cost equation Y = a + bX, what does the 'b' represent?
Using the mixed cost equation Y = a + bX, what does the 'b' represent?
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If the variable cost per collar is $8.00, what would be the total variable cost for 8,000 collars?
If the variable cost per collar is $8.00, what would be the total variable cost for 8,000 collars?
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What total cost is incurred at the production level of 6,000 collars?
What total cost is incurred at the production level of 6,000 collars?
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Which of the following is NOT a characteristic of fixed costs?
Which of the following is NOT a characteristic of fixed costs?
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What happens to the total mixed cost if production increases while keeping fixed costs unchanged?
What happens to the total mixed cost if production increases while keeping fixed costs unchanged?
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Study Notes
Cost Behavior, Operating Leverage, and Profitability Analysis
- Chapter 11 of the Survey of Accounting textbook covers cost behavior, operating leverage, and profitability analysis.
- Key concepts include cost behavior (fixed vs. variable vs. mixed), contribution margin vs. gross margin, and break-even analysis.
Cost Classifications for Predicting Cost Behavior
- Cost behavior describes how a cost reacts to changes in activity level.
- Common classifications are fixed costs, variable costs, and mixed costs.
Cost Behavior (Fixed vs. Variable)
- Fixed costs remain constant regardless of volume changes.
- Variable costs change in direct proportion to volume (increase when volume increases, decrease when volume decreases).
- Mixed costs have both fixed and variable components.
Fixed Cost Behavior
- Understanding fixed cost behavior helps managers effectively plan costs.
- Total fixed costs remain constant, while per-unit fixed costs decrease with increased volume.
- Fixed costs are consistent with total cost behavior.
- Example: A concert promoter (SPI) paying a band $48,000 regardless of ticket sales. The cost per ticket changes depending on the number of tickets sold.
Risk and Reward Assessment
- Risk involves the possibility of sacrifices exceeding benefits.
- Fixed costs represent economic sacrifice and significant risk for ventures.
- Example: If SPI pays a band $48,000 but no tickets are sold, a loss results.
- Risk can be mitigated by shifting cost structures to variable costs. (paying per ticket instead of a fixed sum)
Fixed Cost Behavior Patterns
- Total fixed costs remain constant as activity levels change.
- Per-unit fixed costs decrease as activity increases and increase as activity decreases.
- Example table shows variations in annual rent and annual production (units) under different scenarios.
Variable Cost Behavior
- Variable costs change proportionately with activity levels.
- Variable cost per unit remains constant irrespective of volume.
- Example: Paying the band $16 per ticket sold. The total variable cost increases as the number of tickets sold increases.
Variable Cost Behavior Patterns
- When activity increases, total variable costs increase proportionately.
- When activity decreases, total variable costs decrease proportionately.
- Per-unit variable costs remain constant.
- Example table shows the total variable cost under different scenarios.
Shifting the Cost Structure from Fixed to Variable
- Shifting from fixed to variable costs helps avoid fixed cost risks.
- Example: A company is better off paying variable costs instead of a fixed cost if there's uncertainty regarding sales volume.
Fixed and Variable Cost Behavior
- Variable costs increase or decrease in line with activity levels
- Fixed costs remain constant regardless of activity level changes.
- Per unit values can vary depending on the level of activity.
- Tables illustrated fixed/variable cost behavior at different levels of activity.
Fixed vs. Variable Exercise
- Example demonstrating differences in total costs and per-unit costs for varying activity levels.
- McGreggor Industries exemplifies fixed and variable costs related to selling dog collars.
Mixed Costs (Semivariable Costs)
- Mixed costs have both fixed and variable components.
- Example: A service fee of $1,000 plus $20 per hour.
- The constant $1,000 is a fixed component, while the $20/hour is variable.
Mixed Costs Equation
- The total mixed cost can be represented as Y = a + bX where:
- Y: total mixed cost
- a: total fixed cost
- b: variable cost per unit
- X: level of activity
Calculating Mixed Costs
- Method to calculate total cost when a mixed cost is given, illustrating how fixed and variable costs combine to form mixed costs.
- Illustrative tables provide mixed cost calculation for different scenarios.
Examples of Mixed Costs
- Illustrative examples of mixed costs in various business contexts, including sales staff, truck rental, legal fees, and others.
- Categorized by fixed and variable components.
Fixed, Variable, or Mixed Exercise
- Application exercise to classify costs as fixed, variable, or mixed based on factors like customer count or sales figures.
- Illustrative examples for Molly's Restaurant in the context of activity level. (analyzing different costs at various levels)
The Relevant Range
- The activity range within which fixed and variable cost definitions are accurate.
- The relevant range changes when the company's activity level goes beyond its normal range of production or sales.
- Example: A concert hall with a capacity of 4000 people that the promotion company considers.
Contribution Margin Approach
- Income statements often classify costs by behavior patterns.
- Variable costs are subtracted from revenue to find contribution margin, which covers fixed costs and generates profits.
- Sales revenue minus variable cost is the contribution margin.
Bright Day Distributors: CM & BE Example
- Bright Day Distributors distributes a new herb mixture (Delatine).
- Selling price: $36/bottle; Cost: $24/bottle; advertising Campaign: $60,000.
Contribution Margin per Unit Method
- The difference between sales price per unit and variable cost per unit.
- Every sale contributes $12 to covering fixed costs then, profits.
- The amount left to pay fixed costs after paying the variable cost of production.
Determining the Break-Even Point
- The point where total revenue equals total costs, resulting in zero profit. There is no net income or loss.
- Methods: Equation method and unit sales method are employed.
- The break-even point is where profits and losses are calculated to be zero.
Equation Method
- Calculates the break-even point by setting profit to zero in the income statement equation.
- Demonstrates the calculation to obtain the break-even point in units for Delatine using the sales volume and related costs.
Break-Even Point in Units
- Calculates the break-even point in units needed to cover fixed costs based on the contribution margin per unit.
- This is a straightforward calculation, presenting the method and solution in units needed to achieve the break-even threshold.
Determining Break-Even Volume in Dollars
- Calculates the overall break-even point in dollars by multiplying the break-even point in units by the sales price per unit.
Determining the Sales Volume Necessary to Reach a Desired Profit
- Calculates the sales volume required to achieve a specific profit target.
- The variable cost per unit, fixed costs, and desired profit are factors in reaching this point.
End of Presentation
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