What is a fixed cost? Provide two examples.

INTRODUCTION

In the prerequisite course, Financial Accounting, we explored how business leaders make decisions regarding whether to begin a new project or launch a new product. In this unit we will review the foundational concepts that support cost-volume-profit models and then conduct a deeper, more detailed examination of them.

READING ASSIGNMENT

Chapter Five will discuss variable, fixed, and mixed costs. The chapter then demonstrates a number of ways to measure and project variable costs. Chapter Six will guide us through contribution margins and break-even analysis. Chapter Six will then present the cost-volume-profit models that managers and leaders use to make business decisions.

Chapter 5 End-Of-Chapter Questions

*Please scroll down to the bottom section of this page to see last week’s end-of-chapter answers.

The end-of-chapter questions give you an opportunity to self-assess your knowledge of what you have learned so far. Answers to these questions will be provided in a separate section on next week’s Reading Assignment page. Each week, you are highly encouraged to create a separate heading/section in your Learning Journal, label it “End-Of-Chapter Questions,” and write your answers to these questions under that heading. Your answers to the end-of-chapter questions will not count towards your final grade, but they are still part of the UoPeople learning process and it is expected that you will answer them to ensure understanding of the materials presented in the reading. Comparing your answers with the provided correct answers the following week, will help you understand the reading better, and also help you perform better on future Graded Quizzes and the Final Exam.

Question 1: What is a fixed cost? Provide two examples.

Question 2: What is the difference between a committed fixed cost and a discretionary fixed cost? Provide examples of each.

Question 3: What is a variable cost? Provide two examples.

Question 4: What is a mixed cost? Provide two examples.

Question 5: Describe the variables in the cost equation Y = f + vX

Question 6: How is the cost equation Y = f + vX used to estimate future costs?

Question 7: Why is it important to identify how costs behave with changes in activity?

Question 8: Explain how account analysis is used to estimate costs.

Question 9: Why might the high-low method lead to inaccurate results?

Question 10: Describe the five steps of the scattergraph method and how these steps are used to estimate costs.

Question 11: How can the scattergraph method be used to identify unusual data points?

Question 12: Describe how regression analysis is used to estimate costs.

Question 13: How does the contribution margin income statement differ from the traditional income statement?

Question 14: Describe the term relevant range. Why is it important to stay within the relevant range when estimating costs?

Question 15: Explain how some costs can behave in a nonlinear way.

Question 16: Describe the components of the profit equation.

Question 17: What is the difference between a variable cost and a fixed cost? Provide examples of each.

Question 18: You are asked to find the break-even point in units and in sales dollars. What does this mean?

Question 19: You are asked to find the target profit in units and in sales dollars. What does this mean?

Question 20: For a company with one product, describe the equation used to calculate the break-even point or target profit in (a) units, and (b) sales dollars.

Question 21: Distinguish between contribution margin per unit and contribution margin ratio.

Question 22: What does the term margin of safety mean? How might management use this information?

Question 23: How does the break-even point equation change for a company with multiple products or services compared to a single-product company?

Question 24: Describe the assumptions made to simplify the cost-volume-profit analysis described in the chapter.

Question 25: What is sensitivity analysis and how might it help those performing cost-volume-profit analysis?

Question 26: If you are asked to review the cost structure of an organization, what are you being asked to do?

Question 27: When might the contribution margin per unit of constraint be more effective than the contribution margin per unit for making decisions?

Question 28: Describe the three steps used to calculate the target profit for companies that incur income tax costs.

Question 29: Describe the difference between absorption costing and variable costing.

Question 30: Why do some organizations use variable costing?

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DISCUSSION ASSIGNMENT

CyclePath Company produces two different products that have the following price and cost characteristics:

Bicycle

Tricycle

Selling price per unit

100

400

Variable cost per unit

40

240

Management believes that pushing sales of the Bicycle product would maximize company profits because of the high contribution margin per unit for this product. However, only 50,000 labor hours are available each year, and the Bicycle product requires 4 labor hours per unit while the Tricycle model requires 2 labor hours per unit. The company sells everything it produces.

Required:

a. Calculate the contribution margin per unit of constrained resource for each model.

b. Which model would CyclePath prefer to sell to maximize overall company profit? Explain.

ACCOUNTING ASSIGNMENT

Hi-Tech Incorporated produces two different products with the following monthly data:

Cell

GPS

Total

Selling price per unit

100

400

Variable cost per unit

40

240

Expected unit sales

21,000

9,000

30,000

Sales mix

70%

30%

100%

Fixed costs

$ 1,800,000

Assume the sales mix remains the same at all levels of sales.

Required:

a. Calculate the weighted average contribution margin per unit.

b. How many units in total must be sold to break even?

c. How many units of each product must be sold to break even?

d. How many units in total must be sold to earn a monthly profit of $180,000?

e. How many units of each product must be sold to earn a monthly profit of $180,000?

LEARNING JOURNAL

The Learning Journal is a space where you should reflect upon what was learned during the week. How it applies to your daily life and will help you with your life (career) goals. For this week’s reflection, please write three complete and well composed paragraphs (in your own words) explain how to compute the answer to the following problem:

Phan Incorporated has annual fixed costs totaling $6,000,000 and variable costs of $350 per unit. Each unit of product is sold for $500.

Required:

a. Calculate the contribution margin per unit.

b. Find the break-even point in units.

c. How many units must be sold to earn an annual profit of $750,000?

Requirements: Please find the appropriate solution, If you are using references, please use the proper citation rules.

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