ACCT - Chapter 2

ACCT - Chapter 2 - variable costs removed It represents the...

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Alex Fish Chapter 2 Fixed Cost Behavior Cost Behavior is knowing how costs behave relative to the level of business activity Fixed Cost: a cost that does not change regardless of the number of tickets sold. Operating Leverage: magnifies small changes in revenue into dramatic changes in profitability If all costs are fixed, then one sales dollar becomes pure profit. Variable Cost Behavior: Using a variable cost plan reduces the risk and reward of operating leverage. If sales decrease, they will lose less money than with a fixed cost plan but they will not make as much as a fixed cost plan if revenues increase Effect of Cost Structure on Profit Stability: When sales change, the amount of corresponding change in net income is directly influenced by the company’s cost structure. The best cost structure depends on sales volume expectations An Income Statement under the Contribution Margin Approach: A contribution margin is revenues with
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Unformatted text preview: variable costs removed. It represents the amount of money to pay fixed costs and profits. Measuring Operating Leverage Using Contribution Margin: Magnitude of Operating Leverage = (Contribution Margin) / (Net Income) ; High leverage means high profit volatility. Cost Behavior Summarized: Fixed cost remains constant and variable cost increases as production increases. Fixed cost per unit decreases and variable cost per unit remains constant as production increases. Mixed Costs are a mix between fixed and variable. Relevant Range is the range of activity over which the definitions of fixed and variable costs are valid. (if a concert hall is rented (fixed cost) but demand for tickets forces him to get a bigger theater, this variance is because the cost is outside its relevant range). Costs can be fixed and variable, it just depends to what activity base it is relative to....
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